The cost of government borrowing fell this week, showing a positive reaction to the coalition government’s plan to slash the public finance deficit.

After falls in yield values on 21 October, the UK government bond market remained stable on 22 October, with the yield value of a five-year bond at 1.44 per cent at noon.

Thomas Sartain, a UK and European Government Bonds fund manager at Schroders asset managers said: “The bond markets have responded positively to the coalition’s appetite to address the UK’s spirally public finances head on.

“The gilt market can breathe a sigh of relief that the commitment to reduce the deficit remains very much in place.”

Sartain added that the real challenge started here, however, in the face of slowing momentum in the economy.

The stability of the gilt market will make it more viable for the Bank of England to embark on further quantitative easing – an economic stimulus measure that involves buying high quality assets such as government bonds.

Global strategist at JP Morgan Asset Management, Tom Elliott, said if economic growth began to slow sharply ‘the UK still has a vital weapon [quantitative easing] in hand that it would not have had if the gilt market had succumbed to a prolonged sell-off, due to too much debt in the market.’

“It is worth remembering that in May yields were briefly over 4% and a few months earlier bond rating agencies had expressed nervousness over the UK maintaining its AAA rating,” Elliott added.

He said the JP Morgan bond team were positive on gilts, held on a ‘slightly long duration bias’. “We may see the 10-year gild yield drop a further 20bps (from today’s 2.97%) or so over the coming months,” Elliott added.

Elliott said the investors looking for income were likely to see equities as an attractive option, as valuations were low with higher dividends than the yields offered by gilts.

He said: “Investors had already priced in the CSR [comprehensive spending review] and tax hikes, and the fact that the fiscal tightening programme is in line with expectations is reassuring to investors.”

© Fair Investment Company Ltd