In September, gilts benefited from a sharp rise in risk aversion and a flight to the safety of government bonds as the turmoil in financial markets intensified. Bank of England policymakers voted 8-1 in favour of the status quo at their interest rate setting meeting in early September. The dissenting member voted for a half-point cut from the 5% rate.Overall, the yield on the benchmark 10-year gilt fell from 4.47% to 4.44%. However, there were significant variations in performance between sectors. Yields fell sharply in shorter-dated maturities, but towards the longer end of the spectrum, yields actually increased and the yield curve steepened markedly. Our positioning towards the longer end detracted from performance. However, stock selection and short-term trades added value.
We intend to maintain a long duration position. We anticipate that yields will decrease across the yield curve as deteriorating economic conditions remain the dominant factor influencing the market. We believe that the Bank of England will cut interest rates substantially in an effort to revive the economy.