Shove off Bill Gross you don't scare us

Who's afraid of the big bad Bill Gross of Pimco?

He thought Britain would be. In February the world's most influential bond manager claimed the gilt market was part of a 'ring of fire' - a group of nations perilously close to downgrade, attack by hedge funds and even default.

Gross is of course legendary for talking his own book but his argument that Britain must cut its borrowing radically to avoid attack on the bond markets rapidly became the political consensus.

At the time of the general election Ken Clarke even told us that if we didn't heed warnings like Bill Gross' we would have the IMF in within the year.

Of course it was bunkum. Had investors listened to it and dumped their gilt holdings they would now be sitting on significant losses. Since February - nearly to the day of Gross' pronouncements - gilts begun a sustained and fairly consistent rally. Yes there were a few blips around the election but they were blips in a secular uptrend. Gross called a meltdown in gilts when 10 year debt was yielding 4.3%. It now yields 3.46%.

For Mike Turner, the head of asset allocation at Aberdeen Asset Management, this demonstrates that the bond vigilantes have tried to attack the gilt market but have found that in fact - they can't.

He said: 'Pimco and the hedge funds underestimated the degree of pension fund usage of the UK gilt market. Pension schemes don't own gilts to drive returns they own it to match liabilities. The yield curve on gilts is inverted nearly half the time because the life insurance buyers use long-dated gilts to hedge their investments.'

This scenario is of course different to almost any other bond market because of the extent to which British pension schemes still operate on a defined benefit basis. This strategy drives funds into longer-dated gilts. In the United States and even Europe a far higher portion of their bond investors are investing for return. Turner believes that whatever noise there is in the market from predatory hedge funds, these pension funds just keep steadily buying and constraining yields.

Of course none of this means gilts will necessarily continue to enjoy such high prices. Turner argues we could well see the 10-year bond move back towards a yield of 4%. Yet he thinks that as long as rates are low it will find buyers there.

So for the moment at least we cry: 'Who's afraid of the big bad Gross'. Not us.