Bond, Government Bond

Who’d have thought it, two years since the Conservative government’s large spending package led to government bond prices falling and yields rallying, we seem to have round two! In mid-September, yields on the UK 10-year bond touched 3.75%, and now sit at just under 4.50%, a 0.75% move in a very short period. What does this actually mean for the UK? Well, it’s got to borrow to fund growth to the tune of about £2.9bn. This will, to an extent, be covered by expected tax take from increases in national insurance, capital gains tax and inheritance tax, to name a few. The implication of the moves is market participants want a greater return (yield) for lending to the government.

The offsetting factor is the Bank of England’s interest rate cuts. Unlike two years ago when Liz Truss announced a fiscal expansion and the economy had high inflation and interest rate rises on the cards, we have two expected rate cuts this year. This is good for the economy and growth, and could lead to yields coming down off these highs. We think this could be a great opportunity for UK government bonds considering the recent moves. Overall, this Budget wasn’t really a surprise, maybe the politics of the delivery was in question within the parliament, but outside the fact we knew what was coming aided markets and didn’t lead to a significant overreaction. We believe it’s not anything to be worried about and is supportive of long-term growth.

In the US, more positivity for the economy as private businesses added 233,000 jobs to payroll, much higher than the 115,000 expected. The hurricane impact for September was less severe than expected. Markets also interpreted results from Microsoft and Meta as the top seven names in the S&P 500 Index report for the quarter. Unlike Tesla’s from the prior week, the forward guidance from these two highlighted a less positive outlook. This is similar to a theme from a number of European companies, and led to markets pulling back. Note the earnings expectations remain very positive for the US into 2025.

Signs of a rebound in China’s economic growth continued, with the manufacturing survey suggesting the sector had returned to expansion once again. New orders and increased buying were highlighted as the main positive, while weakness remains from exports. Monday is the start of the National People’s Congress where more stimulus is expected to be announced – watch this space. The combination of positivity for Chinese manufacturing, OPEC potentially cutting production in December, and Middle East conflicts, have led to the oil price rebounding slightly. Notable was the potential for Iranian retaliation following the Israeli strikes. For now markets have noted this but we are watching developments closely.

Finally, the Bank of Japan met this week and left rates unchanged. This is not a surprise considering the recent inflation data. The Yen hasn’t weakened any further since the prior week, which would have aided the committee.

Equity and fixed income markets are assessing a significant amount of data, political uncertainty and interest rate expectations. For us it’s a surprise that weeks like this haven’t come along more often this year. It does, however, provide opportunity going into an investment committee. Active asset allocation is well and truly alive and kicking!

Looking ahead

Next week we have the US election – the big one! The Federal Reserve, Bank of England and Reserve Bank of Australia will be announcing interest rate decisions. US and UK 0.25% rate cuts are expected but the comments after will be key. Finally the National People’s Congress in China provide a fiscal update. What a week!