Fund managers have commented on the news that the global government bond selloff has pushed 30-year UK gilt yields to their highest levels since 1998 – higher than the disastrous mini budget under Liz Truss in 2022 which included £45bn of unfunded tax cuts.
Meanwhile 10-year gilts climbed this week to around 4.8% – their highest level since 2008.
Susannah Streeter, head of money and markets at Hargreaves Lansdown said that the rise in government borrowing costs are likely to constrain Chancellor Rachel Reeves headroom even further, “leading to concerns the government may be forced into further tax hikes, to ensure it meets its fiscal rules.’’
Mike Riddell, Portfolio Manager at Fidelity International, said it was important to emphasise that the gilt sell off of the last few days was a global not just a UK story.
“UK gilt yields are broadly moving with US Treasuries, where 30-year gilt yields have risen by no more than 30-year US Treasuries over the past couple of months. And there has been a similar sized move even in long dated German government bonds in the last month,” he said.
“That’s not to say that the UK has been immune to pressure. Although there’s not any sign of a UK crisis yet, a worrying development in recent days is that gilt yields have risen a little more than in other markets, at a time when sterling has sharply weakened.
“Normally currencies are driven by interest rate differentials, where higher gilt yields relative to other countries would be expected to push the pound stronger. The combination of a weaker pound and higher relative gilt yields has eerie echoes of August-September 2022, and if this continues, could potentially be evidence of a buyer’s strike or capital flight.
“What’s been interesting about the global bond market moves of the past few weeks is that this is an unusual ‘bear steepening’ move, where longer dated bond yields have risen by more than short-dated yields.
“These moves are indicative of fixed income investors becoming increasingly concerned about fiscal largesse, and all the government bond supply that accompanies it. It’s not about inflation concerns, where the market’s medium term inflation expectations are little changed since the beginning of November. Investors are instead demanding a higher risk premia or ‘term premia’ to compensate them for owning longer dated government bonds.”
