Global investors set new record in flight to gilts

International investors are buying record amounts of UK government bonds as the Bank of England’s £75bn QE programme spurs demand, with the yield on the ten-year gilt hitting a new record low.

However, a leading economist said this does not mean the UK is necessarily a safe haven from the eurozone crisis.

The government’s long-term benchmark borrowing costs have fallen to lows last seen in the 1890s, helped by demand from some of the world’s biggest sovereign wealth funds, according to the FT.

International investors bought £28.87bn of gilts in October and November – the largest amount over a two-month period since the data was first collected by the Bank in 1982. Ten-year yields fell to 1.96 per cent last week.

Henderson’s chief economist Simon Ward (pictured) said the gilt purchase figures cast doubt on Chancellor George Osborne’s claim record low yields represent a vote of confidence in the UK economy.

“Yields, instead, have been driven down by a combination of QE, regulatory-inspired bank buying and capital flight from the eurozone,” Ward said.

“In November alone, the Bank bought £23.9bn in QE operations while overseas investors ploughed £16.3bn into gilts – just below a record £16.6bn in September 2008, when Lehman failed.

“With the Debt Management Office (DMO) issuing “only” a net £11.9bn, official and foreign demand was sated by UK non-bank investors and banks selling on a large scale – reflecting, presumably, a judgment that yields were artificially and unsustainably low.”

UK non-bank investors, traditional buyers of gilts, actually reduced their holdings by a record £23.1bn in November after selling off £16.7bn in October, he added.

They have sold down their holdings in gilts by £6.1bn since 2009, compared to a purchase of £37.2bn over the previous three years.

“With conventional market drivers suppressed by price-insensitive official and foreign demand, the key determinants of whether or when yields will recover will be QE and regulatory policies and the success or failure of eurozone stabilisation efforts.

"UK economic and fiscal trends, as well as rating agency decisions, are probably of second-order importance,” Ward said.