Woolnough: What Moody’s downgrade threat Means for Gilts (Artlicle by Kyle Caldwell in Investment Week on 16.02.2012)

16 Feb


M&G Investments’ bond manager Richard Woolnough has backed gilts to shrug-off Moody’s downgrade warning released earlier this week.

Woolnough, manager of the £5.3bn Optimal Income fund as well as a number of other portfolios, said with only moody’s putting the UK on notice, yields should remain fairly steady.

 He expects gilt yields to remain unchanged by the news, adding the overall increase in probability of a gilt default stands at just 0.17%.

He said: “The risk of default on gilts would remain to all intents and purposes unchanged.”

Woolnough was responding to fears UK government bonds could sell-off if investors got spooked by the warning from Moody’s.

The credit rating agency has placed the UK’s coveted triple-A credit rating on downgrade watch, but there was little movement in the gilt market initially, with yields rising only marginally.

“Given only one of the three main rating agencies has taken this negative view on the UK, if we weight their views appropriately then using the increase in default probability from Moody’s and reducing it by two thirds to take account of an average rating from the three agencies, the increase in probability of default would be just 0.17%,” Woolnough said.

However, other managers were more concerned by the actions of the ratings agency.

Barings’ head of fixed income Alan Wilde said he is worried about a potential nightmare scenario of rising gilt yields and a double-dip recession.

“Hampered by slow demand from the eurozone, the UK government now faces the uncomfortable choice of deciding whether to continue down the same path and risk a credit downgrade, or change tack and risk the wrath of bond vigilantes,” said Wilde.

Woolnough disagreed saying the threat of further downgrades for a batch of eurozone countries is more concerning, from a macro standpoint.

“The downgrades for example of Spain from A1 to A3 do result in a more noticeable increase in the probability of default using rating agency methodology,” he said.

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