Too bad the portfolio managers are trying to manage their exposure to sterling interest rates. Yields on UK 10-year government bonds have jumped 100 basis points over the past month, reaching levels comparable to the fall gilt crisis. The yield premium on UK debt over German bunds has doubled since early February, while 10-year gilts have risen from 50 basis points below their US Treasury equivalents to the same amount above. And I blame the Bank of England for this very UK specific problem.
The market’s repeated lurches as fund managers rush to hedge their interest rate risk again are hurting the health of the UK bond market. Analysts at Schroders Plc point to 30-year inflation-linked gilt yields above 1% as a sign that the tension may continue. They cite rising global rates, the end of the central bank’s crisis-buying gilt program, increased bond supply and falling demand from pension plans as contributing factors.