Fears over 50-year gilts overdone, say managers

Fund managers have claimed the second auction of 50-year gilts on July 14 was a success, despite some criticism in national newspapers.

Paul Rayner, senior fund manager for UK government bonds at Royal London Asset Management, says the criticism has centred on the fact the auction was only covered 1.23 times.

“We consider it was a success because it appears hedge funds have not participated in the auction,” says Rayner. “Furthermore, there was quite a lot of buying of stock in the week before the auction by fund managers in the grey market.

“This meant market-makers covered their positions and were not left with lots of stock. After the first auction in May, market-makers held lots of stock, had to sell it and the price fell over the following two to three weeks.”

Proof of the success of the latest auction is shown by the outperformance of 50-year gilts in the first two days of trading by 2% over 2038 gilts, says Rayner. With continued strong demand from pension funds and insurance companies for gilts, Rayner says the 50-year stock should continue to perform well. This is despite the fact Royal London says 50-year gilts do look “slightly expensive”.

Trevor Welsh, fund manager at Morley Fund Management, says the low cover is also attributable to institutional investors only taking their index weightings plus or minus 1% or 2%.

He questions whether investors would buy 50-year gilts at a yield of 4.25% if it were not for regulatory pressure as part of the process of matching assets with liabilities.