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Gilts Lose Allure For Funds As U.k. Woes Deepen

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Gilts Lose Allure for Funds as U.K. Woes Deepen

U.K. debt is losing its allure for the biggest owners of gilts as the nation’s worst recession since World War II batters the government’s finances, according to a Bloomberg survey.

Eight of 10 funds, which oversee a combined $2.9 trillion, said they are either more likely to sell than buy British government bonds in the next three months or have no plans to purchase them, the survey conducted last week showed. Two said they were more inclined to buy than sell the securities.

Prime Minister Gordon Brown’s government aims to sell a record 220 billion pounds ($355 billion) of debt in the fiscal year through March 2010 to finance bank bailouts and measures designed to drag Europe’s second-largest economy out of the recession. Standard & Poor’s cut the outlook on Britain’s AAA credit rating to “negative†from “stable†on May 21, citing the country’s growing debt burden.

The U.K. is “spending heavily to rescue the banking system,†said Yuuki Sakurai, general manager of finance and investment planning in Tokyo at Fukoku Mutual Life Insurance Co., which oversees $54 billion. “The rating should be lowered.†Fukoku, one of the money managers surveyed, has no plans to buy gilts this year, he said.

British government bonds lost 3 percent this year, according to Merrill Lynch & Co.’s U.K. Gilts Index. That compares with a 1.3 percent loss from German debt and a 4.3 percent drop from U.S. securities, Merrill’s German Federal Governments and U.S. Treasury Master indexes show.

Schroder ‘Near Zero’

Reduced demand and rising debt issuance from governments around the world may force the U.K. to offer investors higher returns to hold gilts. Germany’s borrowing costs on 10-year bonds rose to the highest this year at an auction on May 20. Declines in gilts drove the yield on the benchmark 10-year security 26 basis points higher to 3.76 percent in May.

London-based Schroder Investment Management Ltd. said last week it cut gilts in its global fund to “near zero,†citing the probability of a credit downgrade.

“The U.K. clearly has a structural problem as it is spending more than it can justify,†said David Scammell, a London-based money manager at Schroder. “The fiscal outlook just doesn’t work.â€

Britain’s Debt Management Office couldn’t find enough buyers at a sale of gilts on March 25, the first so-called failed auction since 2002. The debt agency, which normally relies on scheduled auctions to raise money, plans to enlist help from banks to sell 25 billion pounds of debt in eight syndications this fiscal year.

Downgrade Expectations

S&P said that Britain’s debt may rise to 100 percent of gross domestic product, a level that would be “incompatible with a AAA rating.†Managers of seven of the funds polled expect Britain to lose the rating, the Bloomberg survey showed.

The U.K. would become the fifth western European Union nation to have its credit grade lowered this year, following Ireland, Greece, Portugal and Spain. The debt burden next year will be 66.9 percent of GDP, exceeding Canada’s 29.1 percent and Germany’s 58.1 percent, according to April 22 forecasts by the International Monetary Fund.

New York-based BlackRock Inc. and Tokyo-based Kokusai Asset Management Co., among the top 10 holders of U.K. debt that make regulatory filings, according to data compiled by Bloomberg, said they are buying gilts maturing in 10 years or less.

“We are long gilts,†said Scott Thiel, the London-based head of European fixed-income at BlackRock. “If yields increase substantially, we’d certainly be a much better buyer of the gilt market.†A long position is a bet that an asset price will rise.

Kokusai’s Holdings

The $47.3 billion Kokusai Global Sovereign Open Fund increased its holdings of U.K. bonds to 6.2 percent of assets, from 4 percent at the start of 2009, according to Masataka Horii, a senior money manager in Tokyo at the fund.

The funds that participated in the survey were Axa Investment Managers, BlackRock, F&C Asset Management Plc, Fukoku, Insight Investment Management, Kokusai, Mizuho Asset Management, Pioneer Investment Management Ltd., Samsung Investment Trust Management, and Schroder.

Foreign investors held 216.4 billion pounds, or 34 percent, of total gilts outstanding at the end of last year, according to the Debt Management Office.

Brown and his croneys parrot about how we have fundamentals and that they are taking care of the economy.

Well, the UK pound is not the world reserve currency, and we have nothing tangible to sell.

Wake up folks, especially you bulls, trouble is coming.

Hey Injin. What's your take?

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Since when is the UK, Europe's second largest economy? I have often noticed Bloomberg quoting this, but from what I can see it is rubbish. In dollar terms at the peak strength of the UK pound in may just have been. However I'm sure France and possibly Italy have now overtaken the UK.

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Gilts Lose Allure for Funds as U.K. Woes Deepen

Brown and his croneys parrot about how we have fundamentals and that they are taking care of the economy.

Well, the UK pound is not the world reserve currency, and we have nothing tangible to sell.

Wake up folks, especially you bulls, trouble is coming.

Hey Injin. What's your take?

I have said more than once on this forum - who in their right mind would buy gilts with a yield lower than inflation and a secondary market value that is guaranteed to fall? Even the buy back at par BoE guarantee is unattractive as the fund managers know they will be exchanged for devauled £.

It's gonna be massive inflation people. We are in the eye of the storm.

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I have said more than once on this forum - who in their right mind would buy gilts with a yield lower than inflation and a secondary market value that is guaranteed to fall? Even the buy back at par BoE guarantee is unattractive as the fund managers know they will be exchanged for devauled £.

It's gonna be massive inflation people. We are in the eye of the storm.

Totally agree, it makes no sense at all, and no more sense that the banks lending money to people who cannot repay it. When it all goes Pete Tong, the politicians will once again say that nobody could forsee it.

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Wake up folks, especially you bulls, trouble is coming.

Indeed, big trouble brewing in the form of these guilts.

And I think most of the public know not a thing about it.

I know not a lot, but am quickly gettng educated, by posters in the know on this forum.

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When it all goes Pete Tong, the politicians will once again say that nobody could forsee it.

Yes it amazes me how they always get away with this excuse, when much of the problems we have already, were foreseen by many on this forum.

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“We are long gilts,†said Scott Thiel, the London-based head of European fixed-income at BlackRock. “If yields increase substantially, we’d certainly be a much better buyer of the gilt market.†A long position is a bet that an asset price will rise.

What is a European Bond buyer supposed to do, except carry on buying bonds until the fixes get better. :lol:

Still it keeps the commissions rolling in.

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I have said more than once on this forum - who in their right mind would buy gilts with a yield lower than inflation and a secondary market value that is guaranteed to fall? Even the buy back at par BoE guarantee is unattractive as the fund managers know they will be exchanged for devauled £.

It's gonna be massive inflation people. We are in the eye of the storm.

Because of the massive deflationary forces we face. They have taken some of the sting out the deflation by stockpile commodities and pumping the equity markets to where they are. Next phase is to scare people back into bonds with another does of deflation. This last phase has got us 3 months on from depth of despair in March and another 3 months of economic survival. As you say if they let a genuine crack up boom take hold it will blow the bond/gilt/Treasury markets to pieces and no one in their right mind would want to own at these rates.

But just imagine if they manage us down to a period of mild deflation keeping bonds looking attractive? For me this is the best case scenario for the World economy and what I think they are aiming for whether it is achievable for long enough to re-balance the economy is debatable but i think we may see several more of these inflationary deflationary cycles if they can manage it.

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Like Moonriver, I do not know that much about Gilts but is this an indication of the markets forcing the hand of the Governemt/BOE with regard to having to rise IRs in order to coax interest back up by offering better returns?

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I have said more than once on this forum - who in their right mind would buy gilts with a yield lower than inflation and a secondary market value that is guaranteed to fall?

You would buy gilts if you thought that was the only investment where you would actually see your money back.

It's gonna be massive inflation people. We are in the eye of the storm.

I think the market is going to win, pushing up interest rates for overspending governments (e.g. ours) and putting downward pressure in inflation.

I don't see the rate of QE increasing (yet).

VMR.

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You would buy gilts if you thought that was the only investment where you would actually see your money back.

If the market doesnt buy them, the government will (be forced to). Hence the inflation.

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Reminds me of an interview with Thatcher in the 80s when she was talking about the record of the last Labour government - "No-one would put a penny piece into gilts, which should have been spelt gUilts under Labour!"

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Because of the massive deflationary forces we face. They have taken some of the sting out the deflation by stockpile commodities and pumping the equity markets to where they are. Next phase is to scare people back into bonds with another does of deflation. This last phase has got us 3 months on from depth of despair in March and another 3 months of economic survival. As you say if they let a genuine crack up boom take hold it will blow the bond/gilt/Treasury markets to pieces and no one in their right mind would want to own at these rates.

But just imagine if they manage us down to a period of mild deflation keeping bonds looking attractive? For me this is the best case scenario for the World economy and what I think they are aiming for whether it is achievable for long enough to re-balance the economy is debatable but i think we may see several more of these inflationary deflationary cycles if they can manage it.

That I agree with :

Hey, what the FED and BoE need is a dead cat bounce, some "green shoots" propaganda followed by a savage return to the bear market. That should get yields down for a while..........hang on a minute!!

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Govts. needed stock markets to rise to support bank recaps.

It appears the point is coming when they'd prefer that money to flow into treasuries, which means they could do with equity markets, and commodity markets crashing again.

The other possibility is that they may be forced, one way or another (Labour kick out Brown and forced to call an election for instance) into cutting spending/raising taxes before growth gets established. I can't see how that would be very inflationary. Is sterling rising 17% inflationary?

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