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Bonds

February 2010

UK gilt prices fell steadily for most of February, as a variety of factors weighed on the bond market. These included deepening anxieties over the deterioration in government finances. During the month, the Office of National Statistics revealed that the public sector registered its first January deficit on record. The Bank of England called a halt to quantitative easing, thereby removing one of the biggest buyers of gilts from the marketplace. The continuing fallout from the Greek budgetary crisis served to further unnerve investors. On top of that, the narrowing of the Tories’ lead in opinion polls led to speculation that the upcoming general election would result in a hung parliament – with implications that a weakened government would be ineffective in combating the deficit.

By the third week of February, the ten-year gilt yield had climbed as high as 4.25%. However, gilts staged a rally after the Bank of England governor, Mervyn King, hinted that the quantitative easing programme was merely on hold, rather than complete.

Nevertheless, the UK yield spread over ten-year German Bunds has widened dramatically since November last year, from 0.35 to 0.9 percentage points. Ten-year UK yields have risen above those of Italy for the first time since the middle of 2008.

Amid concerns about the financial health of several European nations, investors shied away from riskier asset classes. As a result, corporate bond prices fell and the spread between the yield offered by government and corporate bonds widened. New issuance, which has been such a prominent feature of the corporate bond market over the last year, dried up owing to the drop in demand.

 

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Scottish Widows Investment Partnership Limited (SWIP) is registered in England and Wales, Company No. 794936. Registered Office is at 33 Old Broad Street, London EC2N 1HZ. Tel: 0131 655 8500. SWIP is authorised and regulated by the Financial Services Authority and is entered on their register under number 193707 (www.fsa.gov.uk).