Overseas investors may abandon gilts in the run-up to the vote on Scottish independence, with volatility likely to jump as uncertainty increases.
Gilt buyers and fund managers have said they are increasingly expecting market volatility in the run up to the September vote, and have even been calling on the Debt Management Office (DMO) – which issues the gilts – to bring forward auctions scheduled for later this year.
Investment Week understands the latest meeting between gilt market makers and the DMO two weeks ago saw a number of gilt buyers calling for the July-September auction to be held prior to September, in order to avoid the referendum on Scottish independence.
The DMO is said to have been receptive to the argument.
Royal London head of government bonds Paul Rayner said “a lot of people” voiced a preference for July: “We have a number of syndications, and there was one planned for September, but we suggested to the DMO that perhaps they should bring forward that syndication to July, because demand could be compromised by the vote.”
Details of the latest round of auctions were due to be announced last Friday, after Investment Week went to press.
Gilts have rallied this year, with yields falling from 3% to almost 2.5% as growth fears return and investors diversify out of equities after a strong run. But they have experienced volatility because of politics before, notably in 2010 when the general election produced a hung parliament.
A recent Berenberg Bank note also said the UK government’s borrowing costs may rise ahead of the vote. It pointed to the precedent of the referendum for the Canadian province of Quebec in 1995, when Canadian bond yields rose by 20bps relative to UK gilt yields in the final month of the campaign.
Gilt yields could move because the Scottish vote will be so close. A 15 May ICM poll found 46% of Scots set to vote no, with 34% planning to vote yes, and 20% undecided.
Santander bond manager David Scammell said: “A phenomenon of the last five years is overseas investors taking a greater share of the market. They may be more negative during the run up to the vote.”
However, PIMCO sterling bond fund manager Mike Amey said the potential for tighter monetary policy will continue to have more influence over gilt yields than the Scottish independence vote.
“Even in the event of a yes vote, the monetary framework for the UK would remain unchanged and the policy framework has a reasonably high level of credibility,” he said.
UK 10-year gilt yield