According to Bill O’Neill EMEA CIO of Merrill Lynch Wealth Management, if QE is extended then corporate and government bonds should be expected to perform well, at least in the short term.
In recent months, minutes from the Bank of England Monetary Policy Committee meetings have revealed a gradual shift towards loosening monetary policy even further.
The few members of the council that were in favour of raising interest rates in the first quarter of 2011 have since reversed their position and arch-dove Adam Posen has been gaining credence in his support for an additional £50 billion to be pumped into the economy.
O’Neill, said: "Over time, expansionary policy is likely to undermine the returns of government bonds and corporate bonds, but this will likely only really occur once growth is firmly re-established.
"We would expect QE2 to be moderately supportive of yields in the very near term, with longer term growth fundamentals driving the outlook beyond that."
Another boon for the fixed income sector in the UK is that while bank bonds have been under pressure, the sector has not been as badly hit as across the channel.
The reason behind this is that much of the recapitalisation required for UK banks has already happened and their exposure is more to Ireland, which has stayed out of the spotlight in recent weeks.
A second round of quantitative easing should also support equity prices, but O’Neill said he is less convinced that quoted cyclicals would consistently outperform defensives as they did during QE1.
By purchasing Gilts the BoE would push investors towards making a portfolio shift because by lowering the yield and return on gilts investors would look towards riskier assets, such as equities.
In addition, lowering the yield on gilts should lower UK corporate financing costs and support companies with financing difficulty.
