Cash prices for conventionals unusually high – TwentyFour AM

Added 12th August 2016

TwentyFour Asset Management has noticed a strange technical quirk in terms of gilt cash prices at the long end of the yield curve, following Bank of England's failure to buy enough Gilts last Tuesday.

Cash prices for conventionals unusually high – TwentyFour AM

“Bearing in mind that gilts, like most bonds, are issued at 100, or very close to, and usually redeem at the same level, it is interesting to note that two conventional gilts now have cash prices of over 200,” said Chris Bowie, partner and portfolio manager at TwentyFour AM.

Bowie noted that “these lofty heights” within the gilt market are usually reserved for index linked gilts, where the coupon and principal are uplifted with inflation over time – therefore it is not unusual to see cash prices that high for linkers, but it is unusual for conventionals.   

“Anyone buying one of these two gilts, say the 4% of 2060, now, rather than when it was issued about six months after the start of the first round of QE in the UK back in 2009, will see its price come back to par when it matures on 22 January 2060,” said Bowie.

In his view, buying now means locking in at least a 100 point loss over the life of the bond if held to maturity, which is close to a 50% capital loss. Bowie concedes that these gilts can go higher in price terms near term or even over the medium term.

"Don’t forget there is a large buyer out there at essentially any price. But longer term, Mark Carney has placed his chips on growth over inflation," he said. And, coupled with the weakness in the pound, Bowie believes the UK will return to decent and potentially even strong growth eventually.

"It is just possible that at some point in the next two years, enough growth and inflation may creep into our economy to change these risk-free assets into return-free risk," he said.

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