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The Bank of England will probably expand its bond-purchase program by 25 billion pounds ($40.5 billion) after the U.K. entered its first double-dip recession since the 1970s, said Pacific Investment Management Co.
Pimco favors gilts maturing within five to 10 years and longer-dated inflation-protected bonds on bets the central bank will maintain its “very easy” monetary policy until 2014 and keep consumer-price growth elevated, said Michael Amey, a portfolio manager in London. The Bank of England completed 325 billion pounds of asset purchases, a process known as quantitative easing, yesterday. Policy makers meet on May 10.
The central bank “will be reluctant to call it to a halt now given the weakness in the growth outlook,” Amey said April 30 in an interview confirmed yesterday. “They might do another 25 billion pounds and reassess the impact thereafter. They would want to indicate they are still worried about the growth dynamics.”
Pimco, the world’s biggest bond fund manager, is a unit of the Munich-based insurer Allianz SE (ALV) and managed $1.35 trillion of assets as of September.
Gilts rose today, pushing the 10-year yield down four basis points, or 0.04 percentage point, to 2.06 percent at 12:09 p.m. London time. The rate slid to a record 1.917 percent on Jan. 18. Two-year note yields were little changed at 0.43 percent.
Britain’s economy unexpectedly shrank in the first three months of the year, pushing the nation into recession after emerging from five quarters of contraction in 2009.
The Bank of England projected in February growth of 1.3 percent this year before expanding 2.8 percent in 2013. It forecast inflation will fall below its 2 percent target in the fourth quarter.
“It’s unlikely that both of the forecasts for this year will be achieved,” said Amey. “Our expectation is that the U.K. growth number is going to remain close to zero for the bulk of the year. The biggest risk to the U.K. is the euro zone, its major trading partner, and that region is facing recession.”
Monetary Policy Committee members meet next week as the nation’s inflation rate remains above their forecast and the central bank’s target.
Consumer-price inflation accelerated in March for the first time in six months, rising to an annual 3.5 percent. The figure has been above the Bank of England target every month since December 2009.
“Inflation numbers in the U.K. are going to stay sticky because of weak productivity growth and high import prices,” said Amey. “Within the U.K. market, the best value is in inflation-linked for longer-dated bonds and five-to-10 years in nominal bonds.”
Gilts have handed investors a 1.3 percent loss this year, according the indexes compiled by Bloomberg and the European Federation of Financial Analyst Societies, making them the second-worst performer after Greece among 26 sovereign indexes. U.K. government debt was the best performer last year.
Foreign investors sold a net 1.73 billion pounds of gilts in March, after offloading 4.66 billion pounds of the securities in the prior month, the Bank of England said today on its website.
U.K. inflation-protected bonds lost investors 2.2 percent in the first four months of this year, according to indexes compiled by Bank of America Merrill Lynch. Their U.S. counterparts gained 2.9 percent while German index-linked bonds returned 1.9 percent.
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