Gartmore’s Citywire AAA-rated head of credit John Anderson thinks that gilts are some way from an inflection point despite a belief that shorting gilts has been ‘an easy call to make for the last six months.’
Citywire Selection pick Anderson has been increasing the short duration and high yield element of his Corporate Bond and Fixed Interest funds and does not believe that point will come until at least 2012.
Anderson said: ‘We will not see an inflection point until the Monetary Policy Committee (MPC) makes it clear that it is ready and willing to start tightening monetary policy here in the UK.’
‘But that will be later rather than sooner and probably not before 2012.’
Pattullo (pictured) thinks that point is a little closer.
He said: ‘The biggest call for bond markets and bond investors is when does this [30-year bond bull market] turn? We sense it could turn in the next three to nine months. I think we are approaching the end of a long-term structural bond bull market.
‘Timing now is not going to be easy but it’s something we are mindful of. Valuations are definitely expensive but not absurd – not yet anyway. It is the biggest call of my career and we have to get that right.’
Meanwhile, Anderson is not surprised by the UK’s upbeat Q3 GDP numbers which he says come against a backdrop of ‘a devalued currency and the availability of cheap credit’ and thinks the UK may not now have a second round of QE.
‘Companies have had access to cheap credit again and rates have been slashed at a time when UK PLC was still in good shape. People have been talking about further QE but we think QE should have been questioned in the first place.’
Anderson expects believes further QE will be announced shortly in the US, but feels many policy-makers make the mistake of seeing the US and UK economies as similar entities.
‘If the US does not have QE there will be a huge backlash due to the state of its housing and labour markets, which are teetering on the brink but things are not so bad here.’
[BoE governor] Mervyn King is still talking about surplus capacity in the UK but unemployment will go up soon due to the cuts.’
Inflection point 'nowhere near'
Ignis’ chief economist and head of rates Stuart Thomson agrees that gilts can go lower yet.
He told Citywire: ‘We are nowhere near an inflection point-you only have to look at the mortgage market to see that banks are only just starting to delever. If this was an inflection point, mortgage applications would be rising but they are going in the opposite direction.’
Thomson said: ‘This is definitely not an inflection point fir gilts. The GDP figures delay but do not eliminate the prospect of further QE. We still think it is coming but it will now be in February.'
He believes that the GDP numbers have simply delayed QE, however.
‘This is definitely not an inflection point for gilts. The GDP figures delay but do not eliminate the prospect of further QE,' he said. 'We still think it is coming but it will now be in February.'
Two key data catalysts
Insight Investment fixed income product specialist Alison Arthurs says that while gilt yields are at undoubtedly low levels, two crucial pieces of impending economic data have the potential to send yields lower.
‘[Next week], the Fed will be making a decision about whether to re-start QE and if so, then how much they will do and how they will go about doing it. Although there is no direct read-across to the gilt market, the high correlation between the two markets does mean that gilt yields could go lower on the back of that.’
And then there is an upcoming UK inflation report.
Arthurs thinks that if the doves hold sway, this too could also send gilt yields lower.