British Prime Minister Boris Johnson. Picture: BLOOMBERG/JASON ALDEN
Investors are so relaxed about the prospect of extra borrowing that it took the news of Sunak replacing Sajid Javid last week — a move expected to lead to an even more expansionary budget — with barely a ripple. “The bond vigilante is dead,” said Kacper Brzezniak, a portfolio manager at Allianz Global Investors, which is currently neutral on gilts. “One of the crazy things about all this focus on debt is that we have seen missed opportunities to take advantage of low yields.”
One potential risk for bonds is that the extra spending boosts demand in the economy to the extent that it overheats, prompting the Bank of England to tighten policy so as to control inflation. That’s particularly a problem given that the BOE’s view of the economy’s potential growth — the rate at which it can grow without fueling price rises — has been cut to about 1%, well below the government’s 2.8% goal.
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Market data — February 18 2020Market data including bonds, unit trusts and fuel prices
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