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1st September 2011
Publication: FT Adviser

Investors panicked into buying gilts, says TAM

Investment manager claims investors are so nervous about current economic climate that they are counter-intuitively buying UK gilts, despite guaranteed negative real returns.

 

Investors have been panicked into buying UK gilts despite yields being less than half that of inflation, Christian Holland, investment manager at TAM Asset Management, has claimed.

 

He believes that investors are "so nervous" about the lack of economic growth and volatility on equity markets that they are prepared to lock in guaranteed negative real returns.

 

Mr Holland said that the UK 10‐year gilt yield has fallen from 3.11 per cent a month ago to around 2.3 per cent.

 

He said: "A similar trend has taken place in the US and Germany. The scale of the move in government debt reflects mounting fears on a number of fronts."

 

Mr Holland said these include the "farcical" squabbling over increasing the US debt ceiling and the subsequent S&P downgrade and the political and central bank indecision in the eurozone.

 

He said: "But the real problem ‐ and the main driver of falling yields ‐ has been the lowering of expectations for global economic growth and the possibility that we could be heading for a double dip recession.

 

"That the UK economy is suffering from sluggish growth is nothing new and forms the central assumption for most fund managers.

 

"Indeed, combined with a withering acceptance of inflation nearing five per cent, the word 'slugflation' is a new addition to our lexicon – sluggish growth with stubbornly high inflation."

 

Mr Holland highlighted that in a "normal cycle", the Bank of England would leap into action to stamp out inflation but the bank was keeping interest rates "artificially low" in order to maintain what little fragile growth there was in the UK economy.

 

He said: "So now we are in a position where not only is growth weaker than expected but inflation is now making life harder for consumers, thus hurting an economic recovery.

 

"It is unsurprising that big companies, flush with cash are postponing investment in jobs and infrastructure whilst this situation remains – even with cash yielding virtually nothing."

 

By Donia O’Loughlin