UK bonds: is the pressure on?
The UK government is coming under all sorts of pressure as we start 2025. Inquiries, budgeting, and of course, Elon Musk. And the financial markets are responding (and adding to the headache).
UK government borrowing costs (the yield on Gilts) have risen sharply at the end of last year and into 2025. It’s true around the world – the US, France, Germany and so on – but in the UK the cost is now back to pre-financial crisis levels for the 30-year bonds. UK sentiment in particular has been hurt by the fear that the economy may be entering a period of “stagflation” (not much growth, some inflation) as a result of maintained price pressures, preventing further rates cuts by the BoE. Combined with a 2024 Budget that called for an increase in borrowing, and the uncertainty over tariffs imposed by Trump – investors are asking for a little more return in order to lend to the UK.
It’s a strange thing that “safe” asset classes can occasionally be quite volatile, but that’s why we diversify, particularly in fixed income. That allows us time to let the panic die down, and maybe even take advantage of some opportunities. Eventually, rates will fall from here (although not back to zero!). And we’re now, for the first time in a decade, being paid handsomely to wait – so the 7IM models hold a slight overweight to government and quality corporate bonds, both for the yield, and the downside protection.
UK government bonds are in the news, which doesn't happen very often. It's because borrowing costs are now about the level they were before the financial crisis. First of all, let's be calm. It doesn't mean another financial crisis is coming. Bond yields were around that level for 10, 15 years. At the same time, it also just reflects the fact that interest rates are higher now than they have been. Government bonds reflect the interest rates that are available. It's happening around the world as well. In the us, in Germany, wherever you look, there's a little bit of a UK flavor to it. With the new government, with borrowing and spending plans and with Elon Musk taking a few swings on Twitter. But for cautious investors who have a large amount of their portfolio invested in bonds, they should remember the bond market. Despite being an asset class that you can rely on to get your money back over time, day to day can be quite volatile. That doesn't matter if you're investing for five or ten years, you'll be getting your money back from the governments actually at rates far, far better than you've seen over the previous five or ten years. It's not good news, but it's not bad news either.
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