One to Watch: Long game looks risky

THE past 12 months have seen a phenomenal inflow of funds into bond markets, the quoted fixed-interest paper issued by both companies and countries.

For the former, quoted debt is an alternative to funding working capital or development programmes without being exposed to the vagaries of interest rate volatility. The finance director knows his annual interest commitment and the sum he will be obliged to repay to borrowers – the holders of the paper – at a due date.

The position for countries is rather different. Most countries have to issue state bills to fund their current and capital account deficits. Even during those rare periods when the public sector is in surplus, bonds are still issued as a means of raising capital for future public sector projects and investment in infrastructure.

However, when we have the yawning chasms that are now at the core of both the US and UK economies, the need to sell state treasury bills becomes an imperative. For the US, the fact the dollar remains the reserve currency of the world gives it an authority that is unlikely to be challenged in the foreseeable future. For the UK, the level of the pound on the world's foreign exchange markets depends on an assessment of the economic vitality of the country and, perhaps to a lesser extent, is a barometer of confidence in the administration of the day.

Gilt prices are not dictated by supply and demand to any great extent but more by a perception of interest rate and currency valuations. However unlikely it might appear at present, a more orthodox monetary policy seems almost inevitable over the next 12 months, particularly if quantitative easing ignites the inflationary fuse. Higher savings rates will also be required to attract foreign investors into UK treasury bills. As a result, the longer end of the gilt market should now be viewed with some caution.

• The value of your investment could fall and you may get back less than you invested. You should take professional advice if you have any doubt about the suitability of bonds.

BG Group

1,229p -6p

Broker says BUY

AHEAD of a strategy presentation on 5 February, Collins Stewart has raised its target price on BG Group from 1,250p to 1,375p.

The broker said: "Although BG's shares have performed well recently, they have only regained a limited amount of ground they lost versus the sector since the second quarter of 2009."

BHP Billiton

2,042.5p -13.5p

Broker says BUY

CANACCORD Adams has upgraded its recommendation on both BHP Billiton and Rio Tinto to "buy".

But the broker tipped BHP to "outperform" on the strength of its "better operating margins, less dependence on an economic recovery and a return on capital equal to that of Rio Tinto".