Fears grow over gilt market sell-off

The lastest round of quantitative easing (QE) has made gilts more expensive and may drive international bond investors to cash in on the asset class, fund managers warns.

Baring Asset Management said it was "increasingly concerned" about the course of economic policy and what it means for gilts.

It said the revision of second quarter GDP to 0.1% left insufficient growth to allow the UK to reduce its debt.

Barings said the additional round of QE will to make an expensive asset class even more expensive and add to pension fund deficits.

International investors, who own over 30% of the stock of outstanding government bonds, may sell their stock to crystallise their profits, Baring said.

Baring Asset Management head of fixed income & currency Alan Wilde, pictured, said: "Once the hot money parked in sterling and the gilt market takes flight, both sterling and the gilt market are likely to see very significant weakness, to the detriment of investors."

Western Asset Management economist Michael Story is also concerned over the long term prospects for gilts.

He said: "The £75bn in asset purchases should have a strong effect on the gilts curve. Given investors' intense demand to hold lower risk, more liquid assets lately, including gilts, we suspect the gilt rally may not be over.

"However over the longer term we remain deeply concerned about the UK economy's ability to service its debts. While outright default is unlikely, solvency strains may instead be addressed through the back door via inflation or sterling depreciation.

"The BoE's new round of asset purchases fits in nicely with this argument. Can investors really not find any other options than to buy government bonds and pay the government for the privilege to do so?"