No evidence for predictions of sustained rise in gilt yields argues Kames

5th February 2013

Gilt yields are unlikely to go back to ‘normal’ pre-financial crash levels for some time to come, Kames Capital fund manager John McNeill is arguing.

McNeill, who is the gilts and index linked investment manager for Kames says that recent predictions about dramatically rising gilt yields look wide of the mark despite the torrid start to the year.

He says that although there may be further upwards pressure on yields in the short term, this is likely to be modest and there is no evidence to suggest there will be a significant or sustained rise in yields.

McNeill says that although the impact of the drivers of the unprecedentedly low yields such as the Bank of England’s £375 billion asset purchases programme, the eurozone crisis and bank liquidity problems is diminishing, he believes the impact on yields will not be dramatic.

He says: “The Bank of England base rate has been at 0.5 per cent since early 2009 and is likely to remain at this level for the foreseeable future. It is our opinion that the conditions for a significant sell-off in gilts would require a belief that the BoE will move to a tighter monetary stance. We do not envisage this will happen, in fact we think the BoE’s monetary stance will remain accommodative and there is even a chance of this could be eased further through either further asset purchases or further credit easing measures.”

McNeill also highlights three additional factors which could have a bearing on gilt yields during 2013. These are the Department for Work and Pensions proposed consultation on whether to allow companies to smooth asset and liability values, this initially prompted a sharp sell-off in long dated nominal and inflation linked bonds. But McNeill thinks this will have limited impact as it is unlikely that the Government will introduce changes which are likely to drive up the costs of its own debt servicing.

Secondly, the UK’s AAA rating could potentially be downgraded unless growth and revenues return, and finally incoming BoE governor Mark Carney willingness to consider more imaginative monetary policy could lead to a slightly higher inflation risk premium being factored into gilt prices. However he does not believe any of these factors will have a significant impact and yields will remain relatively low compared to historic levels.

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