Foreigners sell UK bonds but probably not due to Brexit concerns: analysts

Foreign investors sold British government bonds in January at the fastest pace in nearly three years, probably reflecting how funds are adjusting gilt holdings after a buying spree late last year rather than nerves about Brexit, analysts said. Overseas investors sold a net 7.59 billion pounds ($9.4 billion) of gilts in January, the biggest monthly drop since March 2014 and following on from 2.97 billion pounds of sales in December, Bank of England data showed on Wednesday.
The central bank is watching closely for signs that foreign investors - responsible for plugging Britain's big current account deficit - are starting to shy away from British assets as the process of leaving the European Union gets underway.
January's outflow scythed the rolling three-month total purchases from foreign investors down to 5 billion pounds. Two months ago that measure stood at 39.43 billion pounds, the highest since BoE records began in 1986.
Overseas central banks and sovereign wealth funds devoured gilts late last year to top up sterling portfolios battered in dollar terms by the pound's post-Brexit vote plunge, and January's sell-off was likely linked to sterling's 2 percent rise against the dollar during the month.
"There is often a correlation between what overseas investors do with gilts and what sterling is doing," said John Wraith, UK economist and fixed income strategist at UBS.
Furthermore, January's sell-off probably also reflected redemptions of 29 billion pounds of the 1.75 percent gilt that matured on January 22, much of which will have flowed overseas.
"In months where you have a maturity of a bond, its not unusual to see a net outflow," said Sam Hill, an economist at RBC. "It would make sense to wait until next month to see if there is a reinvestment of the proceeds to cancel it out. It would be premature to pin the net outflow on any Brexit-related factors."
Analysts said they will watch for any further deterioration that might yet suggest nervousness about Brexit among overseas investors. Britain's current account deficit is 5.9 percent of gross domestic product, meaning Britain relies on "the kindness of strangers", in the words of BoE governor Mark Carney, to balance its books. "It's going to be interesting," said Jason Simpson, fixed income strategist at Societe Generale. "Political worries in Europe could see flows out of French bonds and into US Treasuries and gilts. But if we see a run of negative numbers then maybe that would be a sign that overseas investors are steering clear of the UK for the obvious Brexit reasons."