GARS sells 30-year gilt in UK inflation trade

Standard Life Investments’ £9bn Global Absolute Return Strategies (GARS) fund has cut its exposure to UK gilts, taking profits as yields hit record lows.

The GARS fund initiated a trade on UK inflation last year, taking a long position on five-year inflation through swaps.

The fund, which is headed up by the fund's multi-asset team led by Euan Munro, believe the UK inflation swaps are mispriced and the Bank of England (BoE) is unlikely to cool inflation to reach its 2% target in five years' time.

Tam McVie, absolute return product specialist, said to carry out the trade the team bought a 30-year gilt alongside the swaps, in essence creating an index-linked bond to take advantage of the anomaly in the five-year inflation swap market.

"The position carried duration and, with yields falling significantly, the team decided to take a profit and leave the long position in place but not take any duration from a yield perspective," said McVie.

"With the very strong movements in yields we felt it was time take profits but maintain the swap trade as we still take the view inflation is mispriced.

"In taking out the gilt trade the duration in the fund is the lowest we have seen for quite some time."

The UK 30-year gilt is yielding 3.1% and has fallen 1.4% over the past year, according to Thomson Reuters.

McVie added the fund will stick by its short position on the euro, which makes up 10% of the fund in nominal terms, while taking long positions on the US dollar and Norwegian Krone.

Speaking to Investment Week last month Euan Munro said he believes some form of eurobond will be needed when the European Central Bank (ECB) wades in to tackle the debt crisis, which will result in the euro's value being driven down.