QE sparks short-term gilt yield rise

The latest round of quantitative easing (QE) sparked a surprise rise in gilt yields yesterday, despite fears of long-term falls which could increase pension scheme liabilities.

Yeilds on ten year gilts fell to 2.23% at one point yesterday and 30-year gilt yields dropped as low as 3.35% after the Bank of England (BoE) announced it will inject £75bn into the economy.

Despite this, gilt yields ended the day higher for some maturities because of rising confidence in global markets.

Benchmark ten year gilts ended the day at 2.41%, up 0.15% on the day, and 30 year gilts ended at 3.36, up 0.04% on the day.

However asset managers believe a further tranche of QE would put pressure on gilt yields over the longer term.

J.P. Morgan Asset Management European strategy group head Paul Sweeting said: "QE will lower gilt yields, and also spreads if the market believes that this move will stimulate the economy.

"Combined, these factors could cause a significant rise in the value of pension plan liabilities."

Sweeting added the effect on pension scheme solvency should be limited to the extent they are invested in bonds, but warned the strategy was not without risks.

He said: "The main risk is the risk of inflation. Although inflationary pressures have been eased by the recent falls in commodity prices, QE may still result in a rise in inflation.

"High levels of inflation can be bad for equity returns and, if the government is not buying back bonds, for gilt yields."

Sweeting added the pressure on yields could force annuity prices even higher, and said in some cases retirees may benefit from deferring annuity purchases until prices improve.