UK government bonds are still a favorite pick for some big-name investors including Nedgroup Investments, Jupiter Asset Management and Mediolanum International Funds, despite the nation’s gloomy budget outlook.
A growing band of fund managers argue that yields near a 30-year high can largely be explained by the surprising strength of the UK economy and the Bank of England’s need to keep rates elevated to ward off inflation.
David Roberts, head of fixed income at Nedgroup, disputes the narrative that Chancellor of the Exchequer Rachel Reeves is being punished with sky-high borrowing costs in the debt market as she hunts for ways to plug a budget hole. He has an overweight position in UK bonds and has been buying across the curve in recent weeks, including at the 30-year tenor.
“Gilts have sold off and that’s been extrapolated into meaning Rachel Reeves and Keir Starmer are doing a really bad job,” Roberts said. “The current policies from the bond market’s perspective are actually quite sanguine.”
Investors like Roberts are hoping that when the high BOE rates do eventually bite and the economy slows, policy makers will switch to easing and bonds will get a boost — rewarding what for now looks like a contrarian wager.
With the 30-year gilt yield just seven basis points off its highest since 1998, some of the extra yield investors are demanding may indeed be due to investor caution before Reeves unveils her spending plans in the Autumn budget.
But Roberts and others say the main reason is the UK’s growth rate, which outstripped Group-of-Seven peers in the first half, and the fastest inflation in 18 months.
That’s prompted traders to pare bets on Bank of England interest-rate cuts and price less than 40% odds of another quarter-point rate cut this year.
James Novotny, investment manager at Jupiter Asset Management, concedes it’s been “a bit of a pain trade.”
“You haven’t got that smoking gun for the Bank of England to be, like, ‘OK we need to start cutting rates aggressively,’” he said.
With UK yields higher than those on Treasuries and European government bonds, Jupiter likes having exposure to gilts at the belly of the curve, anticipating there’s scope for big gains if the economy does start to weaken.
Daniel Loughney, head of fixed income at Mediolanum, has stayed overweight at the 10-year tenor and argues it’s only a matter of time before a more pronounced slowdown shows up in headline data.
He says underlying cost pressures are easing and predicts the BOE will cut rates four more times by the end of next year, more than double the amount the market is currently pricing.
“If you can get yourself comfortable with the fiscal environment, the inflation and monetary policy dynamics are supportive,” he said.
Bleak comparisons to the 1970s — when James Callaghan’s Labour government sought a loan from the International Monetary Fund — are “wide of the mark,” according to Andrew Wishart, a senior UK economist at Berenberg.
There’s no currency crisis, the recent energy-price shock can’t be compared to the fallout from the OPEC oil embargo, and the BOE is likely to succeed in taming inflation, he said.
Listen: All Options Considered: Perception of UK’s Outlook vs. Reality
UK yields aren’t rising in isolation: Longer-dated bonds have been under pressure from the US to France and Japan. Yields on 30-year Japanese government bonds are trading near a record high, while the gap between five and 30-year Treasury yields hit the steepest since 2021.
And demand for UK debt has remained strong. An offering of 10-year bonds earlier this month was oversubscribed 3.33 times, while a sale of similar-maturity gilts through banks in February received record orders of £142.1 billion.
“When you pick up pretty much any tabloid or broadsheet in the UK, they’ll tell you how bad the UK economy is performing,” said Roberts, whose fund is currently in the top 20% performers year-to-date among peers, returning over 5%.
But “part of the underperformance of gilts is deserved — given how strong the economy has been,” he said.
With assistance from James Hirai.
This article was generated from an automated news agency feed without modifications to text.
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