Long gilt securities experienced a robust rally in November. However, despite this, the Bank of England did not provide any signals of an imminent policy shift, stated the FTSE Russell Global Investment Research UK Fixed Income Insights report for December.
Additionally, the modest relaxation in UK fiscal policy places the responsibility on monetary policy to achieve the 2% inflation target, implying that a 5% base rate maintenance might be prolonged.
The yield levels contributed to the positive performance of investment-grade credit in the fourth quarter, and it continues to present as a comparatively inexpensive option.
Despite the scale of tightening in 2022-23, Consensus forecasts show no G7 recessions in 2024, highlighted the report. As per the FTSE Russell forecast, there could be a marked narrowing in the positive US growth differential over the UK and Eurozone, but only because US growth is likely to slow to 1.1%.
Inflation dispersion fell in 2023, with UK inflation declining sharply in October, but much depends on UK service inflation falling to achieve the 2% target, given the sector’s size in GDP. The report added: “The smaller UK manufacturing sector is in outright recession.”
In November, financial sentiment changed due to improved risk appetite and eased financial conditions. However, rising UK yields tightened conditions. Sterling strengthened as the dollar fell on the US easing expectations. Divergent economies indicate less synchronised easing cycles.
According to the report: “Pressure for fiscal activism may increase in 2024, but debt/GDP ratios impose important constraints, particularly in the UK.”
Having underperformed during the period of rising yields, investment grade attracted investors in November and spreads narrowed.
The “greenium” in green bond spreads has been restored in 2023, showed the report and adjusted-climate WGBI outperformance was trimmed.
Long dated gilts, Bunds and Climate-World Government Bond Index (WGBI) led the November rally. While long G7 governments enjoyed a strong month, sterling gains reduced non-UK returns.
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