Gilts investors worry about UK debt, Bank of England reveals

Investors in gilts are concerned over the future of the UK’s ability to repay on debt obligations, according to the Bank of England.

In its latest quarterly review, the Bank revealed that over the last quarter investors have been concerned about the debt position of the UK, coupled with the need for considerable gilt sales in 2010.

This concern has led to an increase in gilt yields over the period. Last week saw one of the year’s biggest sell offs, with 10 year gilts up more than 10bps.
‘Contacts noted that gilt yields were affected by concerns about how the gilt market would absorb the scale of prospective issuance by the UK Debt Management Office and/or potential gilt sales by the Bank, it says in the report.
‘Similarly, because of the projected UK government debt position, investors might also have become more concerned about the United Kingdom’s credit standing and demanded additional compensation to hold gilts,’ it adds.

But economists believe that the AAA rating of the UK should be safe, for now. Rating agencies have grouped the UK and US together as the leading financial centres and as such the pain threshold for downgrades is considerably higher than other countries.

The Bank’s quarterly review also shows that a quarter of UK homeowners are at least £200 a month better off today than they were this time last year. The average fall in mortgage repayments compared to this time last year is £130, with almost a quarter benefiting by more than £200.

Pay freezes and a lower inflation rate have helped to protect jobs and mean unemployment is below forecasted levels but there is concern about inflation risks and the security of Government borrowing leading investors to seek refuge in a host of inflation-proof investments.

This is expected to add to concerns Britain remains exposed either to a fiscal crisis or an inflationary spike as the Government seeks to reduce its mounting debt levels.

Also it shows that nearly a third of workers have seen their household income fall by at least £100 per week as unemployment, pay cuts and short-time working have taken their toll. A further 22% of manual workers said that their annual income had fallen by between £600 and £1,200.
‘The recession that began in 2008 was accompanied by an increase in the unemployment rate and a reduction in the rate of growth of earnings. Both these factors push down on aggregate household income,’ the Bank said.