UK Bonds Boosted By Euro Zone Woes
UK government bonds, having seen record lows in the 10-year yields at the end of 2011, will continue to be a sought-after safe haven asset as long as the euro zone's debt crisis remains unresolved, according to bond experts.
Nick Firoozye, head of European Interest at Nomura, told CNBC that as long as the euro zone debt crisis showed no signs of being decisively controlled by policy makers UK government bonds – also known as gilts - would continue to be the investors' choice.
"The big concern for the UK is Europe; it (low yields) is tenable as long as the crisis continues in Europe and our base case scenario is that the crisis will continue for some [countries]," he said.
UK gilt yields have come down in recent months – rivalling those of the German Bund - as the European debt crisis has continued to ravage the economies of much of the euro zone.
As a European Union member but outside the 17 countries that make up the euro zone, the UK retains an enviable position of being able to control its currency and, crucially, to enact monetary policy stimulus if necessary.
Firoozye added that Europe had deeper 'stock' problems which would take time to resolve.
"We have a stock problem in Europe which can only be dealt with in four different ways, through austerity, private sector involvement 'haircuts', monetization or fiscal transfers," he said.
"The ECB has told us monetization is not possible, fiscal transfer happens with big strings attached and is very limited. We're left with either haircuts or austerity," he added.
He said that Europe had reached a "boiling point" in the debt crisis and the UK was "slightly better off than the others."
Moorad Choudary, head of business treasury at global banking and markets at the Royal Bank of Scotland, went further to suggest that gilts are the next best safe haven outside the US Treasury market and that the yield on the 10-year gilt would drop further.
Eric Wand, rates strategist at Lloyds Bank Corporate Markets, agreed that in the short term - with the Bank of England's monetary policy stimulus program continuing to prop up the gilt market and Europe's problems continuing - gilts looked attractive.
"In an ugly contest, gilts are relatively attractive. They have benefitted from the problems in Europe and if this persists gilts will continue to benefit.
We are expecting another 125 billion pounds ($194 billion) of quantitative easing over the next couple of quarters so that will be a boost," Wand told CNBC.com.
Wand added that the low yields on longer term gilts would depend on the broader macro-economic picture.
"Down the line in about six months time it will be a question of the macro situation both globally and domestically and what politicians in Europe do which will determine if Gilts remain the safe haven they are now," Wand said.