The BlackRock Government Securities Fund rose 5.0% during the quarter, outperforming the UK Gilt Sector average, which rose by 4.7%. The evolution of the liquidity crisis into a solvency crisis during the third quarter resulted in severe asset price deflation in credit markets. The financial sector was worst hit and cash hoarding by banks pushed borrowing costs to record highs.The lack of access to short-term capital pushed UK lender HBOS into a merger with Lloyds TSB, and embattled lender Bradford & Bingley into nationalisation.Rising unemployment, a housing market in freefall and a banking system grappling with solvency issues saw short-dated gilts rally sharply, as markets anticipated interest rate cuts by the Bank of England by year-end. Our modest overweight market exposure position was a positive, as gilt yields fell on recessionary fears. Our preference for exposure to Europe relative to the UK was also a positive.
We continue to tactically trade our duration position in the UK and retain a preference for intermediate-maturity bonds. We retain a modest preference for European bonds on a currency-hedged basis, where valuations remain more attractive than their UK equivalents.