AllianceBernstein Says Inflation Trade Is Overdone So Buy Gilts

  • U.K. bonds are the developed world’s worst performers
  • Investor says BOE will remain accommodative on Brexit fallout

Gilts have suffered the biggest loss of any government bonds in the developed world over the past three months, but one investor sees brighter days ahead.

AllianceBernstein Holding LP -- which oversees about $490 billion -- says bets on faster inflation are overdone in the U.K. and will soon unwind, removing the driving force behind the recent selloff. The money manager also expects the Bank of England to maintain monetary stimulus as Brexit bites and the economy starts to deteriorate.

“We expect the data to slow and market expectations on growth and inflation to be pulled back,” said London-based money manager Daniel Loughney, whose $860.5 million global bond fund beat 63 percent of its peers in the past month. He recently cut his exposure to inflation-protected U.K. debt, and said he “sees value” in conventional gilts.

That would mark a turnaround from the aftermath of the European Union referendum, a period when index-linked gilts have outperformed nominal bonds amid speculation a weaker pound will push up store prices. Yet inflation remains less than half the BOE’s 2 percent target and a measure of long-term price pressures known as the 10-year break-even rate has recently stagnated at about 3 percent as investors re-assess the outlook for bonds and the economy.

Nominal gilts have gained just 1.3 percent since the Brexit vote, compared with the 10.8 percent return provided by linkers, Bank of America Merrill Lynch indexes show. Over the past three months, U.K. bonds are the worst performers among developed economies, costing investors 8.3 percent, according to data compiled by Bloomberg.

Gilts will also gain support from the BOE’s monetary policy, according to Loughney. The central bank revamped its quantitative-easing program in August, announcing it would buy 60 billion pounds ($76 billion) of sovereign securities over six months, while cutting its main interest rate to a record-low 0.25 percent.

For a story on the latest thinking of BOE policy makers, click here.

“Markets are saying that the pound’s weakness coupled with fiscal stimulus is inflationary, meaning diminished Bank of England involvement,” said Loughney. “But this is not an either/or. The bank will look through any near-term inflation and will maintain highly accommodative monetary policy for quite some time to come.”

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