Gilts could still be worth a look

An over-supply of government bonds, say many people, will inevitably lead to a fall in the value of gilts. But nobody has told the market that, and values are holding up. So what is the potential for investors?

As we said two weeks ago, all interest rate roads lead to zero. The Bank of England has taken one step closer; UK rates are now 1% - a 315 year low - and set to go lower. The effect of this latest action is negligible, it's a bit like firing a gun into a dead animal - it makes a lot of noise and causes a lot of mess, but doesn't achieve very much other than highlighting the paucity of ideas.

As intimated in the previous issue of the 360 newsletter, we have now increased clients' portfolio exposure to long-dated gilts from 10% of portfolio values to 15%. We are heartened in this decision, believing strongly that we are investing alongside the Bank of England which is no bad thing. Mervyn King has been very explicit in his recent remarks, not only saying that the economic condition facing the UK is as bad as it could be, but also that quantitative easing will commence, probably in March, an important purpose is to buy gilts and drive down the yields. If the yields decline, gilt values rise.

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