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.
Scotland’s first minister has said that Scotland will issue its own government bonds for the very first time.
Humza Yousaf, leader of the Scottish National Party, told delegates at his party conference that issuing a bond would help prove to investors that it was a credible country to invest in.
The Scottish government is permitted to raise up to £450 million a year this way, and £3 billion in total.
But it is likely that it will have to pay a premium to borrow over gilts. Gilts currently pay 4.5% to 5%, depending on the maturity date. If Scotland goes ahead with the plan, then it would pay more on its debt if it was taking money raised through gilt issuance.
Should Scotland achieve independence, it is likely that the track record of Scottish bonds would be used to woo future investors.
- Benstead on Bonds: the bond crash has broken records – is it finally time to buy?
- Don’t expect UK interest rates to fall in 2024
Are we there yet?
It’s been a year of false dawns for bond investors, with fund managers at the start of 2023 saying that the pain was over in fixed income and it was the time to buy bonds.
However, bonds have continued to fall in value this year, pushing yields higher. The pain is continuing due to investors pricing in higher rates for longer on the back of strong economic growth and no signs (yet) of a recession.
In my latest Benstead on Bonds column, I asked whether the record-breaking bond crash was finally done, leading to a good time to buy bonds.
The consensus was that in 2024 the economy would finally start feeling the pain of higher interest rates, which would lead to a mild recession. To stimulate the economy, central banks would then cut rates, providing a much-needed capital boost to bonds to go along side the income.
- Everything you need to know about investing in gilts
- Bank of England holds rates at 5.25% after inflation surprise
Inflation stuck at 6.7%
UK inflation was unchanged at 6.7% in September, owing to a rise in energy costs offsetting a fall in groceries.
This was a slightly higher figure than expected, showing how the Bank of England still has some way to go to kill off inflation.
Gilt prices were stable after the data was published.
Stephen Payne, portfolio manager at Janus Henderson Investors, said that the figure was unlikely to cause the Bank of England to hike at their next meeting (scheduled for 2 November). A pause is expected by investors.
“Petrol prices were the key driver of the higher number, but interestingly food and beverage prices actually fell month-on-month. The October print will be notable, as the spike in energy bills last year drops out of the comparison base, so a sharp fall in inflation can be expected in October to somewhere around 5%,” Payne said.
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