Chillin' out till it needs to be funded
Cameron, Vince Cable and the new Chancellor in London seemingly already have great pointers for their Aussie friends in the commonwealth and the Germans paring their trade deficit in Euroland. The British government has got analysts and bond traders in a tizzy with big austerity targets and first reports from the treasury showing the Tories mean business. If only US was to forego the interest cut obsession, fixed income could really light up both sides of the pond. We are likely to see an inflation uptick if growth returns to the US but the Queen’s country is well and truly managing better with less cash out.
British companies are beating the world in the bond market as investors bet Prime Minister David Cameron’s efforts to tame the budget deficit will preserve the U.K.’s top credit rating.
U.K. corporate debt denominated in all currencies returned 3.25 percent last month, the most in a year and the best among the 10 countries making up almost 90 percent of the $6.2 trillion Bank of America Merrill Lynch Global Broad Market Corporate Index. Bonds of Banco Santander SA’s Abbey National unit and Tesco Plc, the nation’s largest supermarket chain, led the gains, returning as much as 12.7 percent.
Cameron’s coalition government is pushing cuts and austerity measures worth 30 billion pounds ($46 billion) a year to shrink the U.K.’s 11 percent deficit to 2.1 percent by 2015. Investors are speculating this will preserve Britain’s AAA credit rating without slowing the economy too much that it curbs the ability of companies to meet their debt payments.
“Investors are happy with the measures taken by Cameron,” said Christian Weber, a senior credit strategist at UniCredit SpA in Munich. “The perception has spread that it’s better to actually tackle budget deficits than just keep spending and spending and spending, because that limits your ability in the future to help your economy stabilize.”
The extra yield investors demand to hold U.K. corporate bonds instead of benchmark government securities narrowed 4 basis points to 237 basis points in August, or 2.37 percentage points, compared with an increase of 6 basis points for U.S. company debt, according to Bank of America Merrill Lynch’s global index. Spreads widened an average 4 basis points across all countries in the index last month and were unchanged yesterday at 180 basis points. Yields averaged 3.558 percent.