Interactive Investor

Bond Watch: gilts given credit rating boost

28th April 2023 09:47

by Sam Benstead from interactive investor

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Sam Benstead breaks down the latest news affecting bond investors.

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Welcome to interactive investor’s ‘Bond Watch’ series, covering the latest market and economic news – as well as analysis – that is relevant to bond investors.

Our goal is to make the notoriously complicated world of bond investing simpler, by analysing the week’s most important news and distilling it into a short, useful and accessible article for DIY investors.

Here’s what you need to know this week.

From ‘negative’ to ‘stable’...

Credit rating agency S&P has improved its outlook for debt issued by the UK government after Rishi Sunak and Jeremy Hunt abandoned the mini-budget policies set out by Liz Truss and Kwasi Kwarteng.

This week S&P kept its AA rating on UK government debt but moved its outlook from “negative” to “stable”. The highest rating is one notch higher, at AAA.

S&P said: “The government’s decision to abandon most of the unfunded budgetary measures proposed in September 2022 has bolstered the fiscal outlook for the UK.

“Near-term downside economic risks have reduced. That said, we forecast medium-term growth will be below historical averages.”

Scrapping the mini-budget policies sparked a rally in gilt prices, driving down yields. However, investors have been selling bonds this year, and yields on 10-year gilts have risen from 3% in February to nearly 4% today. 

Credit ratings take into account government policy as well as the health of an economy. While maintaining its strong rating, the UK economy is facing a number of challenges, from slowing growth to one of the highest inflation rates in Europe. The International Monetary Fund (IMF) forecasts that the economy will shrink 0.3% this year in inflation-adjusted terms.

US economic growth slows down

Interest rate rises by the American central bank are having an impact on the US economy, which grew 1.1% in the first three months of the year compared with last year, but is lower than the 2% increase expected. This compared with a 2.6% GDP growth rate in the final three months of last year.

While a slowdown in growth, the US economy is still running hot, meaning that the Federal Reserve is set to raise interest rates next week to between 5% and 5.25%.

Matt Peron, director of research at Janus Henderson Investors, said: “The GDP report appeared to show a slowing economy but underneath the headline the story gets more complicated. In fact, both demand and inflation were quite strong, with inventories the driving factor behind the headline weakness.

“This will likely be a concern for policymakers and markets as, although only one data point, it shows we are not out of the woods yet in the fight for lower inflation. With stubborn inflation, and lower earnings, markets could see a challenging few months ahead.”

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