Gilt managers reject ‘bloodbath’ fears

Pimco’s Mike Amey, manager of the £945.1m Allianz Pimco Sterling Gilt Yield fund, told Investment Adviser that gilts would continue to trade at yields in the region of 1.5-2.5 per cent.

Paul Rayner, head of government bonds at Royal London Asset Management (Rlam), said that while a defensive or even short government bond position was currently “a good longer term call”, he expected yields to reach as low as 1.5 per cent and to stay low for the next five years.

The managers spoke out after City Financial’s Ian Williams last month said the currently low yields seen on UK government bonds – which reached 1.92 per cent on January 18 – amounted to a “dangerous bubble” which could result in a “bloodbath” if yields were to rise.

But Pimco’s Mr Amey said: “A slip-up in Europe would create more volatility and it is perfectly conceivable that gilts could rally further if Europe was to go through a really bad period.

“There is a risk that yields could go higher if there was a grand bargain in Europe but I have my doubts as to whether they will go above 2.5 per cent.”

The manager said continued Bank of England support through quantitative easing – the purchase of government bonds by the Bank – will keep yields lower for longer.

He added that his fund was overweight gilts with maturities between five and 10 years. He said the yield curve, or the continuous difference between low short-term and high long-term yields, was currently at its steepest in this area of the market.

Rlam’s Mr Rayner predicted that gilt yields would be higher in a year’s time but “not much higher”, adding: “The most recent rally in gilts could be unwound but it will not cause a substantial rise in yields.”

Mr Rayner also warned against making large macroeconomic bets at a time when markets were highly volatile and being driven mainly by politicians.

“Markets have been very volatile which has allowed us to add value in the relative valuation gaps between regular and index-linked gilts,” he said. “Our strategy is about finding relative value positions rather than trying to second-guess politicians or where yields will go.”

Mr Rayner’s £493m UK Government Bond fund underperformed the UK Gilts sector during 2011, gaining 14.3 per cent, although it has posted a second-quartile return of 41.4 per cent over five years.

The Allianz Pimco Sterling Gilt Yield fund lagged the IMA UK Gilts sector over the course of 2011, gaining 15 per cent compared with the sector’s 15.3 per cent average return. However, the fund has topped the sector over five years to January 30 with a return of 48.8 per cent compared with a sector average gain of 40.4 per cent.