Glasgow, Scotland-based Abbey National Asset Management, which manages roughly £4.5 billion in fixed-income assets, is shortening duration in gilts in an attempt to protect itself from potential weakness in the market on the back of improved economic growth. Rod Jack, the firm's fixed-income investment manager who focuses on the U.K. government market, says the next purchase will likely be the U.K. 5% bonds of '12, which are being auctioned this week and should bring interest into the market, because investors want to increase their liquidity. The firm has recently upped its allocation to cash from 2-3% to 5-6% on the view that yields will continue to fall.
Jack says he is seeking refuge in seven- to 15-year bonds and is selling paper in the ultra-long area of the duration curve to go slightly short his benchmarks. Abbey National benchmarks its gilt portfolios against the All Stoxx index, which has a duration of 6.6 years and the FT over 15-year bond index, which has a duration of 12.5 years. "There is still a lot of corporate and government issuance coming, and there is still demand. However, the issuance is coming at a time when people are realizing we're reaching the nadir in terms of interest rates. No part of curve gives you any protection right now," he says.
