News Archive

The following is one in a series of timely market comments by City Financial fund managers. In light of today’s Bank of England announcement I hope you find this commentary of use with your clients. – Andrew Williams, Chief Executive, City Financial

BoE Extends Gilt Purchases – 6 August 2009

Today the Bank of England extended its bond purchase program by 50 billion pounds increasing the total purchases to 175 billion pounds. This suggests that they believe the U.K.’s recession is deeper than originally expected and has come as a surprise according to consensus. The BoE has given a clear signal that their stimulus plan and record low interest rates, which have been kept at 0.5%, was not sufficient - with the economy needing more support.

With the business environment still in a fragile state, the gilt market reacted with yields plunging after the BoE statement. The yield on the benchmark 10-year gilt fell 17 basis points to 3.73%. Prices in short-dated gilts jumped 1.00% approximately, with medium-dated gilts experiencing a 1.75% increase and long-dated gilts a 3.00% rise. Interestingly index-linked gilts have underperformed conventionals on the day.

The City Financial Strategic Gilt fund was positioned appropriately and has fully benefited from the BoE's decision and we continue to monitor the environment. The Fund is 100% invested in the market with no cash – holding 85% in conventionals and for the first time this year the Fund has a modified duration that is greater than the modified duration of the FTSE Actuaries All Stock TR Index.

The fact remains that the BoE is now a buyer of another 50 billion pounds of gilts, increasing the quantitative program as the BoE is less than confident about the robustness of the economic recovery.