S&P reaffirms UK’s AAA rating; positive news for gilt-based ETFs

Jul 30th, 2012 | By | Category: Fixed Income

The Standard & Poor’s (S&P) credit rating agency has affirmed its ‘AAA’ long-term sovereign rating on the United Kingdom.

S&P reaffirms the UK's AAA rating; positive news for gilt-based ETFs

S&P has affirmed the UK’s ‘AAA’ credit rating, noting “strong demand for long-dated government bonds by both domestic and non-resident institutional investors”. (HM Treasury pictured).

The stable outlook reflects S&P’s expectation that the government will continue to consolidate public finances, enabling net general government debt as a percentage of GDP to stabilise by 2014 before declining in 2016 and beyond, and that an economic recovery will begin to gain traction.

S&P said in a statement: “Our view of the UK’s wealthy and diverse economy, fiscal and monetary policy flexibility, and adaptable product and labour markets support our unsolicited ratings on the sovereign. In our opinion, the UK government remains committed to implementing its fiscal program, and we believe it can respond rapidly to economic challenges.

“We also view the UK as having deep capital markets with strong demand for long-dated government bonds (gilts) by both domestic and non-resident institutional investors. The market-value weighted average maturity of UK government debt is more than 14 years, which helps contain the government’s annual public gross borrowing needs compared with those of peers.

FEATURED PRODUCT

Vanguard UK Government Bond ETF (VGOV)

– Provides diversified exposure to AAA-rated UK
government bonds (gilts)

– Physically tracks the Barclays Capital Global
Aggregate UK Government Bond Index

– UCITS compliant, London listed, UK Reporting Status
sort, eligible for ISAs and SIPPs

– Total Expense Ratio (TER) just 0.12% pa

“We also expect that the Bank of England (BoE)’s monetary policy, which we view as highly accommodative, will help keep the government’s borrowing costs in check. The BoE’s monetary policy includes its Asset Purchases Facility, under which a total of £375 billion in gilts will have been purchased between March 2009 and November 2012.”

Overall, S&P expects real GDP growth to begin to recover in the second half of 2012 and to strengthen steadily thereafter. The projections are based on the UK government’s current fiscal consolidation plans, an assessment of recently introduced measures designed to support and shield the economy, and the assumption that the eurozone will stabilise.

S&P noted that the UK economy’s capacity to absorb shocks has improved. The agency cited increased household savings and the substantial cash holdings of large corporations as credit positive factors, as well as the introduction of a series of measures to support the economy, including the Funding for Lending Scheme, further quantitative easing, and the Extended Collateral Term Repo (ECTR) facility.

“In our opinion, these should help to keep private-sector borrowing costs low, ensure a steady supply of credit in the event of further stress in the international capital markets, and maintain a competitive exchange rate. The latter would help to increase the share of exports in GDP, a shift that the global slowdown has recently interrupted,” said S&P.

The news is encouraging for gilt-based ETFs, which are a quick and efficient vehicle for investors seeking exposure to the ‘safe haven’ asset class. Gilt-based ETFs have proved popular with investors attempting to immunise their portfolios from the worst-case downside risks associated with the current market turmoil.

London-listed gilt ETFs include:

Vanguard UK Government Bond ETF (VGOV)
Tracks the Barclays Capital Global Aggregate UK Government Bond Index, a market-weighted index that measures the performance of the market in UK government fixed income securities denominated in Pound Sterling. The index currently has 46 holdings and an average duration of 9.5 years. VGOV is physically replicated and has a Total Expense Ratio (TER) of just 0.12%.

iShares FTSE UK All Stocks Gilt (IGLT)
Tracks the FTSE Actuaries Government Securities UK Gilts All Stock Index, providing exposure to Sterling-denominated UK fixed income government bonds (conventional gilts). The fund currently has 39 holdings and an average duration of 9.6. IGLT is physically replicated and has a TER of 0.20%.

SPDR Barclays Capital UK Gilt ETF (GLTY)
Tracks the Barclays Capital UK Gilt Index, a market-capitalisation-weighted measure of the performance of the UK Government bond (Gilt) market. The fund currently has 37 holdings and an average duration of 10.2. GLTY is physically replicated and has a TER of 0.15%.

DB X-trackers iBoxx £ Gilts Total Return Index ETF (XBUT)
The iBoxx £ Gilts Index represents the overall Sterling-currency sovereign debt issued by the British government. The index currently has 35 holdings and an average duration of 10.0. XBUT is synthetically replicated via an over-collateralised swap. The collateral holdings are AAA-rated government bonds. The TER is 0.20%.

Lyxor ETF iBoxx £ Gilts – GBP (GILS)
The iBoxx £ Gilts Index represents the overall Sterling-currency sovereign debt issued by the British government (see above). GILS is synthetically replicated via a fully collateralised swap. The collateral holdings are AAA-rated government bonds. The TER is 0.18%.

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