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Pimco move to sell gilts raises spectre of a UK sovereign debt crisis

Fears that Britain may be heading for its first sovereign debt crisis since the 1970s hit a new intensity after Pimco, the world’s biggest bond house, declared that it is starting to sell off its holdings of gilts.

By Angela Monaghan and Edmund Conway

The American investment group said it will be a net seller of UK Government bonds this year, at the very point when the Bank of England brings its £200bn programme of purchases to and end and the Treasury attempts to raise unprecedented sums through the capital markets.

The move is doubly embarrassing for the Government because the head of Pimco’s European investment team is Andrew Balls, brother of Schools Secretary Ed Balls, who is mastering the Government’s re-election strategy. The move will be seen as a financial vote of no-confidence in the Government’s handling of the economy.

Paul McCulley, a managing director at Pimco, said: “We are currently cutting back in the US and UK because… supply and demand dynamics are likely to be negatively affected as borrowing rises and central bank buying declines.”

The yield on the benchmark 10-year gilt has leapt from below 3pc to above 4pc in the past year amid concerns about the Government’s capacity to bring its budget back under control, and worries about the coming end of quantitative easing (QE), under which the Bank has been buying massive numbers of gilts. However, UK equities staged a strong start to the year, with the FTSE 100 up 87.46 points to a 16-month high of 5500.34.

The Pimco switch was described by Mike Amey, its portfolio manager in London, as “a significant policy statement”.

“Those areas of the bond market that have had greatest support from central banks will be most vulnerable as that support comes to an end,” he added. Few economists expect the Bank, whose monthly meeting begins tomorrow, to extend the QE scheme beyond February, meaning the private sector will soon be solely responsible for demand for government debt. The gilts market has also been supported by new liquidity rules, which have seen banks buy large gilt holdings to bolster their balance sheets. These purchases, too, are seen as one-off, again implying a sudden drop in demand in the coming months.

Although the QE scheme has had its detractors, it has kept gilt yields down and helped prevent the flow of money in the economy from dropping into “depression territory”, according to economists. Figures from the Bank yesterday showed a welcome 0.3pc rise in the holdings of broad money, M4, by non-financial companies, in November, indicating that the radical policy of pumping cash directly into banks’ balance sheets may now be yielding effects.

Some accuse the Government of failing to lay out extensive enough plans on how to bring the budget deficit back under control, with the major ratings agencies threatening to downgrade the UK’s credit rating unless the next Government provides more ambitious plans for budget reduction. In what was seen as the starting gun for the pre-election battle, Labour yesterday published a document accusing the Conservatives of hiding the full details of its tax and spending plans from the public, sparking a war of words between the parties.

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