Boost For Government Bonds?

April 5, 2018

Falling supply will create boost for government bonds

Following the spring financial statement, British government bonds are set to enjoy a boost with the news that supply will be falling to the lowest levels in more than 10 years.

UK Gilts To Outperform US

The bonds, which are issued by the Debt Management Office to fund public infrastructure works and large-scale spending, will see issue targets slashed for 2018-19, to the tune of £16.9bn, according to a panel of policy experts.

The supply reduction means that in the short-term, even in a climate of rising global yields due to a better global economic outlook, gilts are likely to outperform both US and German debt.

The markets view the spring statement as being less of an event than in previous years as the big UK finance announcements are now communicated in the autumn budget. However, investors will welcome the news about the government’s plans for public borrowing in the fiscal year ahead. Ten-year gilt yields have dropped by c.20 basis points since the 1.69 two-year high reached a month ago.

Different analysts responded to the news in varied ways. NatWest Markets said that they expected to see a degree of gilt outperformance in the near-term, but with a fade opportunity in the face of a further BoE interest rate hikes in May. They also expect to see further tightening of interest rates later in the year.

Santander noted that public finance data had exceeded market expectations in the last few months. The bank expected to see flattening unwinding next year and supply jumping again rapidly as Brexit officially occurs.

IA Data Shows Bond Sales Strong In January

Figures from the Investment Association (IA), show that bonds were the biggest selling category for eight months in a row in January, with net receipts of £1.6bn. The biggest-selling sector was in sterling strategic bonds, which attracted £808m of investment during January.

The strong performance of fixed income products could seem counterintuitive with anticipated BoE interest rate rises later this year, but these funds invest on a global scale and hedge their exposure to currencies. This means that they do not necessarily incur the full risk of UK interest rate changes.