The UK’s budgetary largesse has bolstered the bear case for gilts, which are already under pressure from sticky inflation and low growth, said Mark Dowding, the chief investment officer at RBC BlueBay Asset Management.
The biggest tax-cut package since the 1980s was intended to give the economy — and the Tory party — a much needed boost before Brits are expected go to the polls in 2024.
But the nation’s sovereign bonds are poised for their worst week in a month. With interest costs rising on the government’s £2.7 trillion ($3.4 trillion) debt pile, Chancellor of the Exchequer Jeremy Hunt’s Autumn statement did little to stem the slide.
“It does reopen Pandora’s box with respect to concerns over the UK debt burden,” said Dowding, who’s long been bearish on gilts and harked back to the surge in government yields seen last year in the wake of former Prime Minister Liz Truss’s mini-budget.
“We had anticipated that the Conservatives would want to do some sort of election giveaway to try and shore up their vote share. But the delivery of the budget is just reaffirming in our eyes why there is very little value in gilts at the moment.”
While Hunt argued that a looser fiscal stance would be paid for by reducing government spending through 2027 and 2028, investors weren’t convinced. The yield on 10-year gilts was up 20 basis points in the week at 4.30% as of 2:56 p.m. in London, a two-week high.
And while the Office for Budget Responsibility forecast a lower proportion of debt to GDP in the future, Dowding said that looks optimistic.
“This math may be enough to satisfy accountants at the OBR, but it remains to be seen whether markets will be as generous in their assessments over the coming weeks,” he said.
--With assistance from James Hirai.
