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July 30, 2014 7:27 pm
Overseas investors are selling out of British government bonds at levels not seen for more than two years, in a trend analysts say could pose a problem if it continues.
In the first half of 2014, non-UK investors reduced their holdings of gilts, which are used to fund the UK’s deficit, in four of the six months, selling £5.7bn. This compares to net purchases of £17.7bn in the same period last year.
The shift has come as a surprise to banks and fixed-income fund managers.
“In the context of the outstanding stock of gilts these sales are small,” said Russell Silberston, fixed-income portfolio manager at Investec Asset Management. “But if this trend is sustained then it could be of concern to the market.”
Jamie Searle, strategist at Citigroup, said the figures were unexpected. “Foreign ownership of gilts has been steady for a number of years but you see ebbs and flows.”
Explanations have been suggested, including uncertainty about the future of Scotland, but the most popular theory among fund managers is that overseas investors may be taking profits ahead of a possible rise in interest rates.
In the wake of the financial crisis, overseas investors became the largest holders of UK bonds, a trend that enabled the country to keep its funding costs low in spite of a surge in issuance caused by expanding government debt.
Overseas investors, including foreign central banks buying sterling-denominated assets for foreign exchange reserves, held almost 30 per cent of the £1.42tn gilts in issuance as of March, according to the UK’s debt management office.
Domestic pension funds and insurance companies, once the main buyers, hold just over a quarter of the market. However, some analysts believe they have the capacity to absorb more.
On Tuesday there was record demand for a £5bn sale of index-linked gilts, which are popular with this group of investors because they hedge against inflation.
Paul Lee from the National Association of Pension Funds said there remains huge demand for gilts linked to inflation from association members.
“We estimate that demand amounts to a trillion pounds over several years,” he said. “There just aren’t that many assets that can provide that hedge.”
As pension fund demand grows, the UK is issuing more of the long-dated bonds required by the industry. Overall, the average maturity of UK gilts has increased from 14.4 years at the beginning of 2008 to 15 years.
However analysts pointed out that there remains a question mark over the future of the gilts held by the Bank of England through its quantitative easing programme, which account for about a quarter of the market.
“The elephant in the room is what will happen to the share of gilts owned by the Bank of England,” said Mr Silberston. “If it sells its holdings and foreign owners are selling too then you may have the perfect storm.”
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