Aberdeen, Allianz Temper Bets on UK Gilts as Hurdles Loom

Fund managers at aberdeen group plc and Allianz Global Investors GmbH are trimming their bets that gilts will outperform European bonds as they brace for a series of economic tests in the UK.

Allianz has taken profit on a wager that UK government bonds would return more than German counterparts. Aberdeen is looking to “reset” its bullish position on gilts versus bunds. And Citigroup Inc. strategists closed their December recommendation to purchase UK bonds over French government debt. 

Those moves seem prescient: the market on Wednesday raised the premium required to justify holding UK debt over German bunds by the most since December. 

Investors are still concerned about sticky inflation and broad budget fragility, and a raft of high-profile events and data lie ahead this month that could produce market-moving shocks. There’s a Bank of England rate decision next week, followed by key inflation data, and Chancellor Rachel Reeves’ long-awaited fiscal statement, both on March 26. 

“We’re happy to take some chips off the table,” said aberdeen fund manager Matthew Amis. “As we head into UK data and Rachel Reeves territory, maybe we don’t want to be as long as long gilts as we were.”

The gilts market held up well after Germany’s plans to unleash hundreds of billions of euros in defense spending sparked a rout in European bonds last week. Investors focused on Reeves’ promises not to increase borrowing to fund extra military outlays, and the UK’s 10-year yield gained only about half the almost 50 basis-point leap seen for comparable German debt since the start of the month.

But now, some investors say the performance looks stretched, and the latest burst of strength may be ebbing. On Wednesday, the extra yield investors demand to hold UK debt over Germany’s climbed to 184 basis points. That gap narrowed on Friday after data showed the UK economy unexpectedly shrank at the start of the year, denting the pound and reducing the gilts premium to 179 basis points. 

Ranjiv Mann, senior portfolio manager at Allianz Global Investors, went long gilts versus bunds in the fourth quarter, but has now “tactically” taken profit. Citigroup strategists closed their recommendation, saying “it seems prudent to take profits early.”

Still, Daniel Loughney, head of fixed income at Mediolanum, is bullish. 

“Our biggest overweight now is gilts,” he said, pointing to Reeves’ meetings with market participants as a factor reassuring investors. “The fundamentals of European bonds have shifted and deteriorated.” 

The flip-flopping highlights investors’ on-again-off-again relationship with sterling assets. At the start of the year, bonds were tumbling alongside the pound, prompting market chatter about the “Great British Peso” — a reference to a more volatile emerging-market currency.

The BOE is predicted to leave its key interest rate unchanged at 4.5% on March 20. The outlook for the rest of the year remains uncertain, with policymakers divided on the path for rates, and concerns about unreliable UK data mounting. 

Kaspar Hense, a portfolio manager at BlueBay, will be watching the inflation report on March 26. He expects the rate to stay above 3% for the time being — “significantly higher” than in Europe.

“We still remain somewhat vigilant in the UK,” Hense said. “Gilts have obviously massively outperformed bunds over the last days.”

And when Reeves speaks the same day, investors will be wary of markets replaying their response to her previous budget announcement.

“With a mind on the generally negative reaction to Reeves’ October Budget, we would prefer to remain on the sidelines when it comes to gilts,” said Felipe Villarroel, fund manager at TwentyFour. He’s looking instead for “UK opportunities in solid corporate and financial names.”

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