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“Investors in government bonds face a difficult year due to increased risks and concerns over the ending of quantitative easing (QE) programmes in the UK and US. There is a raft of potential bad news overhanging the government fixed-income markets - be it heightened risk of default, rating downgrades, inflation scares when there is so little yield protection, buyers strikes as well as the end of, or pausing in, QE."

“By example, the Bank of England reverse auction of corporate bonds at the end of last week could signal the start of the unwinding of its other, far larger, holdings of gilts. Banks are being encouraged to lend: if that pressure becomes significant, we have concerns that the Bank will not find sufficient buying demand at low yields if this reverse auction programme extends into gilts."

“In the UK, the range of possible outcomes has rarely been wider. At the pessimistic end, interest rates could be on hold for as long as two years as a new government this year concentrates on fiscal tightening, counterbalanced with an easier-for-longer monetary policy. Interest rates at such historically low levels for such a long period will do little to reduce concerns among investors in long gilts about longer term inflation fears."

“Our investment choices currently favour short dated (up to 2 years) sterling fixed income instruments, be that long call options on intermediate Eurosterling contracts, or short equivalent puts."

"Further afield, we are tactically long short dated US government securities after their swan dive last month and the less-than-stellar employment data just released. We are bearish about Japanese government bonds as the authorities there have a 'rising stock of debt / lack of required growth in tax income' dynamic which is becoming increasingly concerning.”

Augustus AM Ltd is an investment manager of segregated accounts and funds. Its core strengths lie in fixed income and foreign exchange markets. The firm manages c. USD$8.8bn of assets as at 30th June 2009 across three areas: traditional long-only, absolute return and single strategy hedge funds. We currently employ 28 members of staff.

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