Gilts have underperformed the Global Treasury aggregate over the past few months and are currently near fair value.
Will they continue underperforming?
T he Bank of England (BoE) policy is unchanged with a focus on Funding for Lending (FLS), while deemphasizing quantitative easing (QE). The BoE remains optimistic that the FLS will provide enough stimulus to counteract ongoing austerity, but there is as yet no evidence of a meaningful pickup in credit. Austerity is hurting growth, which means that easy monetary policy will be required for an extended period and a rating downgrade cannot be ruled out. Long-end relative performance is also vulnerable to pension reform which will reduce long-term gilt demand.
Concerning the future course of monetary policy at the BoE, the new BoE governor Mark Carney has said that he will consider nominal GDP targeting and other alternative approaches once his term starts in July. But radical change may be tough to implement at an institution that has struggled to uphold its inflation-fighting commitment in the face of persistent inflation surprises in recent years.
Our Global Fixed Income Strategy service believes it is too early to position for radical change at the BoE and recommends a modest underweight allocation to gilts in a global hedged portfolio. (tweet this!)