Chatfeild-Roberts: Gilt yields could plunge below 2%

Jupiter’s Merlin multi-manager team has said yields on 10-year UK and US government debt could fall well below existing record lows if markets continue to price in a Japan-style economic outlook.

The team, led by John Chatfeild-Roberts alongside Algy Smith-Maxwell and Peter Lawery, said the European banking crisis began "unfolding at an accelerating pace" in August and a resolution to the saga is needed if benchmark yields are to rise.

Yields on 10-year gilts and treasuries have set fresh record lows in recent weeks, of below 2.2% and 1.85% respectively, as investors fret over the prospects for global growth.

"Financial markets are well on their way to discounting a Japanese-style economic outcome for the Western world," Chatfeild-Roberts said.

"If the Japanese experience is to be fulfilled, then the yield on 10-year US and UK government debt might fall significantly below 2% before the current banking crisis is over."

The managers said the current economic cycle is particularly abnormal, requiring "further bloodletting to take place before the global economy can heal" and warned the European Central Bank's policy of buying Italian and Spanish bonds is unsustainable.

In comments made prior to the precipitous drop in the price of gold seen last week, when bullion fell 10% to below $1,640 an ounce, Chatfeild-Roberts said the team had locked in some profits on the precious metal across its portfolios.

Noting the 56% increase in collateral requirements for gold speculators to invest in CME gold futures, Chatfeild-Roberts said "it is quite possible these requirements will increase further, but it is important to stress this is only allegedly being done to manage counterparty risk, rather than as a subversive attempt by authorities to manipulate the gold price down".

The CME said at the end of last week that it was raising margin requirements by a further 21%, with margins on silver and copper also rising by 16% and 18% respectively.