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UK downgrade has "muted" impact on gilts
28 February 2013
The depreciation of the sterling is a much bigger concern than the UK government bond market in light of Moody's re-rating, according to investment managers
The downgrade of the UK’s Aaa credit rating to Aa1 has had little impact on the country’s government bonds, according to industry experts.
Investment managers were quick to downplay the impact of the re-rating despite the hype in the mainstream press. The move had been widely expected in the investment community for some time.
Nigel Sillis, director of research, fixed income and currency at Baring Asset Management, said the impact on UK government bonds was “relatively muted” because “the market had expected the downgrade” and “the ‘safe-haven’ features of gilts have become less relevant in light of an improving Eurozone debt profile”.
Mike Amey, head of sterling portfolios at PIMCO, said the downgrade had little impact on UK government bonds: “We have not seen a significant reaction in the Gilt market, where the prospect for further Quantitative Easing is driving market levels. However, sterling continues to depreciate, in a move which we expect to continue.”
Ian Winship head of sterling bonds at BlackRock, agreed that the depreciation of the UK currency is more of a worrying factor and said “at some point [this] will have more of a real economic impact”. He added: “The likely impact of the downgrade will be political, with implications for the shape of the UK chancellor’s March budget and the outlook for the deficit.”
Baring’s Sillis said much of the weak sentiment towards the sterling had already been priced in because rating agencies put the UK on negative watch last year. The currency hit a two-and-a-half-year low against the dollar on March 1, adding to fears that the UK is on the verge of a triple-dip recession.