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.
Why coming election could affect the gilt market
Politics could upend the gilt market in 2024, the world’s largest fund manager BlackRock has warned.
The investment firm says that there is a risk that UK political parties could promise much greater spending in order to win votes, which could lead to investors downgrading UK debt and pushing up yields.
A general election is expected at some point this year, with the exact date yet to be revealed.
BlackRock’s UK chief investment strategist Vivek Paul said that while Conservative and Labour party would not want to unnerve bond investors, pressure to win votes may lead them to promise tax cuts and spending increases.
Bond investors that react to politics and in turn force change on decision makers are known as “bond vigilantes”.
They came to the fore when Kwasi Kwarteng was chancellor and announced unfunded tax cuts in September 2022. Investors reacted by selling gilts and therefore increasing borrowing costs for the government, which caused them to back down and ultimately led to Kwarteng and former prime minister Liz Truss resigning.
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But Goldman Sachs is more positive
Investment bank Goldman Sachs however takes a different view on gilts, arguing that much of the pain for the investment is over as the Bank of England has acted aggressively to bring inflation down.
Goldman Sachs says that this “difficult period” for bond holders, when yields rose over the past two years, seems to be reaching an end. Yields began to fall at the end of 2023.
It adds: “Despite this recent rally, however, we believe that now may be an opportunity to allocate a portion of an investment portfolio into gilts.”
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Its reasoning is that while the sell-off in the last few years reflects a higher inflation and policy rate environment, the commensurate rise in rates means compensation for inflation is greater than it has been for many years.
With gilt yields currently at their highest levels since 2008, the bank says investors can now generate a meaningful return in a portfolio both in nominal and real (inflation-adjusted) terms.
“Yields moved a little lower in the last quarter of 2023 but are still around the same level they were in May 2023, and we do not believe it is too late to be adding gilts exposure,” it said.
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