Gilts resting on a bed of nitroglycerine?
This was the rather bold statement made by Bill Gross, managing director at PIMCO, this week. PIMCO is the world’s largest bond manager, which means such a warning should be taken quite seriously.
Fears about the value of UK Government Bonds (Gilts) centre around the risk to the UK credit rating. Goss has estimated there is an 80% chance of a downgrade due to high levels of debt.
If the UK lost its coveted ‘AAA’ rating, this would result in higher interest rates on its debt. At the time when the UK needs to cut its deficit, a greater cost for servicing debt would not be good news.
With the Debt Management Office set to sell £225.1bn of gilts this year, investors will be keeping a very close eye on the Gilt market and, importantly, how decisive the next Government is when it comes to cutting the deficit.