Insight

Some good news for gilts | Weekly Market Update

17 January, 2025

I wrote in my 2025 outlook piece that one of the big risks for 2025 was that government bond yields continue to grind higher. This is bad for a couple of obvious reasons: higher mortgage rates slow the housing market and lower consumer spending and higher debt costs slow business investment. It’s also not great news for governments: a lot of the money raised via higher taxes just goes straight out the door again on higher interest payments.

Well, the first couple of weeks of the year certainly started with this continuing to be the dominant theme. It’s tempting to say this a UK (and Labour government) specific issue but the reality is it is US treasuries that are the global risk free asset and Trump with his pro-growth and tariff focussed agenda has been pushing US treasury yields higher. UK government bonds (and German bunds and Australian bonds) have simply been following them onwards and upwards.

 

 

The good news is that the last couple of days have brought some relief. Inflation came in below expectations in the UK and the US and this gives central banks more room to cut rates. And yesterday, the newest member of the Bank of England Monetary Policy committee Alan Taylor gave an interesting speech that (in his opinion at least) the Bank of England were prepared to do just that. For example, here’s a chart from his speech showing some scenarios for interest rates in the UK.

 

One interesting point here is that his downside scenario has 8 interest rate cuts for 2025. This compares to (only) 2 cuts priced in by markets today (today’s market pricing is not far off Case 3 above). If the economy slows then I think the Bank of England are prepared to be aggressive and this morning’s UK GDP numbers did indeed show an economy that is slowing. Quarterly GDP growth was 0% which, when you allow for the fact that the population is still growing via immigration, means that GDP per person (which is what we should really focus on) is actually falling. Recessionary GDP per capita means, I think, the Bank of England should act.

This mix of high starting yields and slowing growth and inflation therefore makes gilts look attractive to me. And I am not the only one: the Goldman Sachs Investment Strategy Group has UK gilts as their best expected returning asset for 2025. I am not sure I would go that far but if you are bearish the UK economy (as a lot of people I meet seem to be) then gilts look to be a great hedge to me today.

 

Chris Brown, CIO

cbrown@ipscap.com

The value of investments may fall as well as rise and you may not get back all capital invested. Past Performance is not a guide to future performance and should not be relied upon. Nothing in this market commentary should be read as or constitutes investment advice.

 

 

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