Recovery jitters lead investors to fixed-interest assets

Disappointing economic data from the US boosted demand for fixed-income assets during June, after a May in which net retail sales of bond funds dropped sharply to reach their lowest level since August 2008.

The UK government raised £8bn from the sale of a 4.25% gilt with a 30-year maturity. The sale took place through banks and was the biggest syndicated gilt offering by the UK Debt Management Office (DMO) to date. The DMO’s chief executive commented that the sale’s success “reflects well on the continued strength and attractiveness of the gilt market”.
Sterling and government bonds also received a boost following the coalition government’s Emergency Budget, which provided some encouragement that the government is working to bring down the UK’s substantial budget deficit. However, the Government’s planned programme of spending cuts and tax increases is expected by many to hamper the UK’s economic recovery. Ongoing concerns about the outlook for the eurozone’s economy provided further support for sterling against the euro. The pound also strengthened against the US dollar towards the end of the month as G20 leaders backed the UK’s plans to cut its budget deficit.

June saw the Bank of England (BoE) maintain interest rates at an all-time low of 0.5 for a sixteenth consecutive month; however, one member of the central bank’s interest-rate-setting committee broke ranks to vote in favour of an increase in rates. This helped to fuel expectations of higher interest rates later in the year, providing fresh impetus for the pound. The BoE’s favoured measure of money supply (M4) saw strong growth, indicating the central banks’ programme of quantitative easing measures is having an effect.

In his inaugural Mansion House speech, Chancellor of the Exchequer George Osborne announced sweeping changes to the regulation of the UK financial sector. He intends to scrap the present structure of financial regulation and hand responsibility for regulating the UK’s financial sector to the BoE.

The UK Gilts sector was the best-performing IMA sector during May. The only IMA sectors to achieve positive returns during the month were the Global Bond sector, the UK Index-Linked Gilts sector and the UK Gilts sector. The Sterling Strategic Bond sector was the fourth most popular sector among retail investors, but proved the least popular sector for institutional investors during the month. Looking back, the Sterling Corporate Bond sector proved the most popular sector for both retail and institutional investors during 2009 as a whole.