Bloomberg News

Ultra-Low U.K. Yields Owe More to King Than Osborne, Poll Finds

February 12, 2012

Feb. 10 (Bloomberg) -- Chancellor of the Exchequer George Osborne’s pledge to eliminate the budget deficit isn’t the main reason U.K. government-bond yields are at record lows, say most analysts in a Bloomberg survey.

The Bank of England’s quantitative-easing program, which has so far purchased a quarter of outstanding gilts, was identified as the single biggest cause by a third of 27 economists polled. Just over a quarter said investors fleeing other European bonds were driving U.K. rates lower, while 22 percent said Osborne’s plan was the main reason. The survey was conducted Jan. 20 to Feb. 9.

“It’s QE and the flight out of Europe, although QE probably has the edge as the most important factor,” said Marc Ostwald, a gilt strategist and Monument Securities in London. “The government’s plan is the gloss.”

Osborne says low bond yields vindicate his budget cuts, which will see more than 700,000 state jobs axed in the tightest fiscal squeeze since World War II, and set Britain apart from debt-laden euro-region nations including France that have had their credit ratings cut. The plan, which seeks to erase the bulk of a budget deficit equal to 9 percent of gross domestic product, risks pushing the economy into a second recession in less than three years, the opposition Labour Party says.

“Although the fiscal framework is important, we already had low yields before the austerity program was announced when the new government came in,” said Ross Walker, chief U.K. economist at Royal Bank of Scotland Group Plc. “The Bank of England owns a lot of the outstanding stock, and then you have pension funds and banks who have to hold gilts. The bit of the market that is de facto free is relatively small.”

More Easing

The Bank of England yesterday pledged to pump another 50 billion pounds into the U.K. economy, raising the target for bond purchases to 325 billion pounds ($514 billion). The program will leave the central bank with about a 27 percent of the 1.2 trillion-pound gilt market once the new round of purchases is completed in May.

“Financial repression is the artificial manipulation of bond yields by the authorities -- that’s what we did after World War II, particularly in Britain, and artificial manipulation probably explains about three-quarters of why bond yields are this low today,” Danny Gabay, director of Fathom Financial Consulting, said during a panel discussion in London this week.

While yields have fallen since the Bank of England led by Governor Mervyn King began its asset-buying program in early 2009, the sharpest drop came last year as the sovereign debt crisis led investors to reject the debt of other European governments.

Bond Yields

The yield on the benchmark 10-year gilt has fallen 1.65 percentage points to 2.22 percent in the last 12 months. The yield fell to 1.917 percent on Jan. 18, the lowest since Bloomberg began compiling the data in 1989. Similar-maturity government debt yields 2.87 percent in France, 5.13 percent in Spain and 5.45 percent in Italy.

“The government’s deficit-reduction plan has not only helped restore confidence in the U.K. public finances and resulted in lower market interest rates, it has also created space for the independent Bank of England to keep monetary policy more accommodative than it otherwise would have been,” the Treasury said in a statement. “And it has also meant that the U.K. regained its international fiscal credibility and marked us out as a safe haven.”

Investors may have little choice when looking to buy securities other than U.S. Treasuries or Japanese government bonds.

Haven Status

“Gilts are undoubtedly being used as a safe haven,” said Philip Shaw, chief economist at Investec Securities in London. “It may be strange that the U.K. is benefitting when it has such a large budget deficit. But it’s outside the euro zone, so it’s attractive. QE isn’t hurting either.”

Eliminating the structural deficit by 2017 is the cornerstone of Osborne’s economic policy. Deviation from the program would “be abandoning the deficit plan that has brought us the stability other nations today crave,” he said on Oct. 3, the same day that Standard & Poor’s affirmed Britain’s AAA credit rating.

The National Institute of Economic and Social Research forecasts the U.K. economy will shrink 0.1 percent this year and grow 2.3 percent in 2013, compared with projections in October for growth of 0.8 percent and 2.6 percent.

--With assistance from Mark Evans in London. Editors: Andrew Atkinson, James Hertling

To contact the reporter on this story: Gonzalo Vina in London at gvina@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net


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