As the UK gilt market grows at an unprecedented rate, at some point more investors will be needed to support the market
In brief:The UK gilt market is growing at an unprecedented rate. While the dominance of insurance companies and pension funds is clearly waning, there is no reason to suppose that the structural demand from these investors will fall. Of more concern is the recent foreign selling: the latest Bank of England figures show net selling from overseas investors of around £19 billion in the last three months.
UK banks are stepping up purchases of gilts, partly an attempt to strengthen the quality of their balance sheets, but banks are also positioning ahead of the impending FSA announcement. The latter is widely expected to force the UK banking sector to increase its holdings of gilts by upwards of £150-200 billion. Such a development would mean that the banks will be the biggest buyers of gilts for many years ahead.
The joker in the pack is the Bank of England, which has now purchased over £100 billion of gilts since March as part of its quantitative easing programme. The initial size of the programme is £125 billion, but it is most likely that the Bank will decide to extend the programme.
At some point, other investors will be needed to support the market – the obvious enticement would be that of higher yields.
