Bank of England Holds Rates but Gilts Remain Challenged

The Bank of England Monetary Policy Committee has chosen to keep rates at 0.25% in their September meeting - the damage is already done for investors in government bonds

Simon Molica 15 September, 2016 | 2:46PM
Facebook Twitter LinkedIn



Simon Molica: It has very recently been announced that the Bank of England's Monetary Policy Committee had unanimously voted 9 to 0 that they would keep interest rates at 0.25% in September.

Now this follows a quite an aggressive loosening last month where the interest rate was actually brought down from 0.50% to 0.25%, which had been held at 0.50% for a while. Now this really reflects the implications of what Brexit could mean. However, since then actually the data coming through on the underlying U.K. economy has actually surprisingly been okay. So I guess there's two schools of thought here possibly the loosening last month has worked and the impact it's had is good. Or actually the impact of Brexit hasn’t really been felt on the underlying economy. Let's remember to-date Article 50 hasn’t been triggered and we do still remain a member of the EU.

Maybe something important to focus on is the risk free rating, what's been happening there. So if we measure that by the Gilt yield. Actually this year yields in Gilts have fallen and has been somewhat surprising because it has been low yields. So with them falling it means the asset classes actually performed quite strongly, but I'd say our view is from here that it's quite an unattractive asset class. If we look at the differences between the valuation implied return and its fair value it doesn’t look encouraging. But I guess for me the real change going forward is if we have a breakdown in that negative correlation between bonds and equities than that would be very challenging for investors. 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Facebook Twitter LinkedIn

About Author

Simon Molica

Simon Molica  is a portfolio manager for Morningstar Investment Management

© Copyright 2024 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy        Modern Slavery Statement        Cookie Settings        Disclosures