UK government bonds eked out a positive return in 2015 and investors shouldn’t expect much more from 2016.
Global sovereign-debt markets were dominated last year by the European Central Bank’s unprecedented bond-purchase program and the Federal Reserve’s decision to raise US interest rates for the first time in almost a decade. In 2016, the possibility of a referendum on Britain’s European Union membership will capture investors’ attention, though the uncertainty around the vote may be a risk to UK assets, Bloomberg reported.
Benchmark 10-year gilt yields climbed from a record low set in January 2015. The Bank of England held interest rates at an all-time low throughout the year despite signals at times that an increase was approaching sooner than the market was pricing. With UK economic growth slowing, markets haven’t fully priced a move by the BOE until the end of 2016.
“Gilts have been a bit of a sideshow,” said Azim Meghji, the London-based head of UK fixed income at Santander Asset Management, which manages the equivalent of $170 billion. “The focus for most investors has been what the ECB are going to do and what the Fed will do and those have been two competing themes throughout 2015, which has left gilts at the mercy of where the broad market for government bonds has gone.”
The benchmark 10-year gilt yielded 1.96% close on Dec. 31 in London. The yield dropped to a record-low 1.32% on Jan. 30, and peaked at 2.21% in June.
With UK inflation near zero and the outlook for global growth remaining shaky, BOE officials have less incentive to raise interest rates.
