Newton expects market volatility to support gilts

Polling placeWhat does a UK bond investor do when the outcome of the general election is uncertain? Shift to gilts with a shorter duration, of course.

This is what Howard Cunningham, fixed income manager at Newton Investment Management, and his team have been doing ahead of the UK general election tomorrow (May 7).

They expect the gilt market, particularly those with shorter maturities, to be supported by volatility in other domestic asset classes, and they have also taken positions in non-sterling bonds because they believe the currency could depreciate further.

Newton’s view is for the quarter, driven by factors beyond just the outcome of the election, though for now the general election is the most immediate concern.

The result of the general election is “too close to call”, Cunningham says, with the prospect of a coalition being formed between the Conservatives and anti-EU party UKIP, or the Scottish National Party holding the balance of power and agitating for another referendum on independence.

Sterling, which has declined recently, is “most likely to feel the heat” and uncertainty in other domestic asset classes may be greater. This means that in the short term, gilts are likely to be supported, particularly shorter maturity ones, as supply will be limited.

Cunningham says: “This quarter promises to be a choppy one for gilt and sterling investors with the UK general election still too close to call and external factors such as the Federal Reserve preparing for ‘lift-off’ and the unresolved Greek situation could inject further volatility.”

Over recent weeks, Cunningham’s team has reduced gilt duration, including re-introducing short positions in the long gilt future in Newton’s Global Dynamic strategy. Newton’s gilt strategies have a shorter duration stance than benchmarks, and the team has also switched some investment-grade exposures from sterling to euro-denominated bonds and dollar exposure.

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