Allianz Goes Against the Grain to Buy U.K. Government Bonds

(Bloomberg) -- In a market crowded with investors who call U.K. government bonds overvalued, Allianz GI is sticking its neck out with a contrarian view.

The investment manager, which oversees 494 billion euros ($604 billion), has bought gilts on conviction that inflation in the nation has peaked. Its bullishness stands in contrast to Aberdeen Standard Investments and Pimco, both of which consider the securities as rich.

Allianz was short gilts in the run-up to the Bank of England’s November meeting, when policy makers increased U.K. interest rates for the first time in more than a decade. It has been looking for an opportunity to switch sides since 10-year yields climbed to more than 1.30 percent earlier this month, fixed-income portfolio manager Kacper Brzezniak said.

The yield on benchmark 10-year gilts has jumped about 16 basis points since the beginning of the year, but Allianz predicts the selloff in U.K. bonds won’t last. Brzezniak sees Brexit risks coming back to the fore, resulting in a “reasonable possibility” the BOE won’t increase rates this year.

“From the Brexit side, we think the risks are tilted to the downside, given the recent market moves,” he said. “We expect inflation to fall, removing some of the pressure from the BOE, and a stronger pound also releases some pressure.”

Gilts handed investors a 1.4 percent loss this month through Monday, compared with declines of 1.2 percent and 0.5 percent for Treasuries and German bonds, respectively. Brzezniak is a lonely voice in a market crowded with participants calling the British debt overvalued.

Rich Valuations

Both Aberdeen Standard Investments and Pimco see Treasuries as more attractive following a more sustained selloff since September last year.

Gilt valuations are “rich” compared to other bond markets, said Mike Amey, a managing director at Pacific Investment Management Co. in London, which continues to operate as an autonomous subsidiary following its acquisition by Allianz SE. The U.S. offers greater value because it’s further through the interest-rate cycle, he said.

Aberdeen Standard Investments is also underweight the U.K. securities, although it would consider buying bonds again if 10-year yields reach 1.50 percent, said Liam O’Donnell, a money manager in Edinburgh. The yield was 1.34 percent as of 12:28 p.m. in London. The pound fell 0.4 percent to $1.3927 after earlier climbing to a post-Brexit high of $1.4003.

“I’m primarily underweight gilts right now because global bond tailwinds are fading,” said O’Donnell. “I’m not buying the ‘bondmageddon’ argument. The selloff in U.S. Treasuries gives investors a relatively attractive investment opportunity.”

To contact the reporter on this story: Charlotte Ryan in London at cryan147@bloomberg.net.

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Keith Jenkins, Marco Bertacche

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