UK gilt investors expect budget to pass without market drama, Morningstar says

By Reuters News

Oct 21 (Reuters) - Leading investors in British government bonds expect finance minister John Healey to succeed in avoiding stoking gilt market volatility in his October 28 budget, research firm Morningstar said on Wednesday.

Most of the eight fixed-income funds Morningstar surveyed did not hold significant over- or underweight positions in gilts ahead of the budget.

Britain's bond yields are the highest among the Group of Seven advanced economies, largely due to expectations of higher Bank of England interest rates because of higher inflation, rather than budget worries.

Indicators of fiscal risk, such as the spread between yields and interbank rates, and sovereign credit default swaps, have shown little change in recent months, in contrast to France.

Here is a summary of Morningstar's report.


• Most funds said gilts offered attractive value

• Royal London's UK Government Bond Fund expects no major new spending. It is focused on 5- to 7-year gilts, and is overweight in longer maturities

• Fidelity's MoneyBuilder Corporate Bond Fund expects a low-volatility budget and plans no meaningful change to positioning

• Jupiter's Strategic Bond Fund said it would be "very surprised" by substantial fiscal loosening, and shortened the maturity of UK debt it holds earlier this year due to greater volatility

• BlueBay's Global Investment Grade Corporate Bond Fund is taking a wait-and-see approach, saying the market reaction will hinge on a credible long-term fiscal plan

• J.P. Morgan's Aggregate Bond Fund is taking no material UK duration risk and expects a mix of tax rises and reforms

• Invesco's Global Bond Fund (UK) is not positioned for the budget, seeing Middle East developments as a bigger driver of government bonds

• M&G's Global Macro Bond Fund holds only a very small long-duration position, having bought five-year bonds in Germany, Britain and the United States after yields rose rapidly

• Allianz's Gilt Yield Fund is modestly long UK duration versus its benchmark and expects a cautious budget aimed at shoring up fiscal credibility

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