BOE Easing Makes Gilts Best Place to Be for Frankfurt Investor

  • Frankfurt Trust says it’s not bullish on U.S. Treasuries
  • U.K. 10-year gilts post biggest weekly gain since August

For Frankfurt Trust’s head of asset allocation, U.K. government bonds are the place to be.

While some investors question whether the Bank of Japan and the European Central Bank are looking to reduce their stimulus measures, Frankfurt-based Christoph Kind, whose company oversees $20 billion in assets, predicts the Bank of England will cut interest rates, diverging further away from the Federal Reserve which is set to tighten policy this year. This means gilts will outshine their U.S. peers, he said.

“The best place to be is gilts because the Bank of England is the one central bank that’s still going to cut interest rates,” Kind said in an interview Thursday. “The Fed is about to raise rates in December, inflation rates are going up a bit, so I wouldn’t be too bullish on bonds, especially Treasuries.”

Gilts returned 16 percent this year through Thursday, according to Bloomberg’s World Bond Indexes. That surpasses the 4.9 percent earned by Treasuries and the 6.4 percent gained by German securities.

The world-beating performance by gilts is still intact even after they led a slump in global bond markets earlier this month amid speculation major central banks were reaching the limits of their capacity to inject stimulus. They were further weighed down as better-than-expected U.K. economic data following the Brexit vote in June spurred doubts on whether the BOE will follow its August rate cut with another this year.

BOE Minutes

Yet, uncertainty on how the negotiations to bring the U.K. out of the European Union will progress have lifted prospects of the BOE maintaining its ultra-loose monetary policy after boosting asset purchases in August.

Minutes of the BOE’s September meeting showed that a majority of the nine-member Monetary Policy Committee “expected to support a further cut” to the official bank rate this year. Swaps pricing indicated about a one-in-four chance of a rate cut by the MPC’s December meeting, data compiled by Bloomberg show.

Benchmark 10-year gilts posted their biggest weekly advance since Aug. 12, with yields falling 14 basis points, or 0.14 percentage point, to 0.73 percent as of the 5 p.m. close in London Friday. The 1.50 percent bond due in July 2026 rose 1.385, or 13.85 pounds per 1,000-pound ($1,296) face amount, to 107.28.

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