Gilts Set for Best Week Gain Since 2023 as Rates Offset Politics

p8l1yqu0qs4hhhnr0e0tfkdq_media_dl_1.png Bloomberg

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(Bloomberg) — After starting the week at their highest in almost three decades, yields on long-dated gilts are poised for their biggest drop in more than two years. 

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The concern about turbulent politics and additional government borrowing that pummeled bonds in recent weeks has been eclipsed by hopes for a deal between the US and Iran, easing energy prices and revived wagers on fewer interest-rate hikes. That’s put the UK 30-year yield on track for a drop of more than a quarter percentage point this week — the biggest among Group of Seven sovereign bonds — as it slipped five basis points to 5.59% on Friday. 

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“Positioning has become an increasingly influential factor as the widely discussed fiscal and inflationary vulnerabilities of the UK are continually kept in the market’s focus,” Barclays Plc strategist Moyeen Islam wrote in a client note. “However, for outright long maturity yields to rise further, more ‘bad news’ would be needed.”

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Slower-than-forecast UK inflation numbers this week, combined with soft jobs and retail data, have curbed wagers on interest-rate increases, giving bonds a lift. Traders now see just two quarter-point Bank of England interest-rate hikes by year-end, compared with as many as three last week.

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Meanwhile, Greater Manchester Mayor Andy Burnham ruled out changes to the UK’s fiscal rules, easing fears that spending and borrowing could surge should he eventually oust Keir Starmer as prime minister. 

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Yuji Maeda, head of global fixed income investment, Nomura Asset Management holds a bullish view on UK debt. 

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“We may think about adding long gilts/short sterling when weak economic fundamentals materialize, while non-economic factors such as political concerns or the Middle East issues fade,” he said in an interview with Bloomberg.

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Later Friday, investors will be looking to Moody’s Ratings for its latest take on the UK’s outlook. In November, the agency maintained an Aa3 rating and said its stable view reflected broadly balanced risks to the economic and fiscal outlook.

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“If the government delivers on its existing plans, concerns around fiscal sustainability are likely overstated and the current pessimism should unwind as that becomes clearer,” said April LaRusse, head of investment specialists at Insight Investment. 

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Still, “any deviation from that path, or a meaningful deterioration in the growth outlook, would quickly raise questions around policy credibility,” she said. “Right now, consistency is key.”

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