Chart of the Week: Born In The USA

Bonds have been hitting the headlines, with yields on UK government bonds soaring. So I thought I’d call on one of our in-house experts to explain exactly what’s going on.

Here James Athey, Co-Manager of our Global Bond fund, shares his insights:

UK government bonds (aka gilt-edged securities or just ‘gilts’) are big news at the moment, and not in a good way. As the chart below shows, yields on 30-year gilts have reached levels not seen since the late 1990s.

Investors have a number of concerns about the UK economy. The outlook for growth is quite weak, the inflation picture is uncertain and employment data has been volatile, with different data sources telling different stories.

Over and above the domestic economic backdrop, there are two other factors in play. The US plays an outsized role in driving market pricing everywhere. And the Federal Reserve has warned investors to scale back expectations for future rate cuts. This has contributed to a rise in bond yields in many other countries. This effect has been compounded by uncertainty about the policies of incoming president Donald Trump, including the potential for tariffs and tax cuts to further fuel inflation. We’d therefore characterise the rise in UK yields as to an extent being Born In The USA.

The other factor is UK fiscal policy. Like most governments across the world, the UK government is spending more each year than it earns in tax revenue. This means it needs to borrow money and it does this by issuing bonds. Borrowing is high by historic standards and as a result investors are demanding an increased yield.

What happens next will depend on many factors: economic data, the words and deeds of the Federal Reserve and the Bank of England. But potentially most crucial for long-term UK economic stability will be the response of Chancellor Rachel Reeves.

Key takeaway: The market is challenging Rachel Reeves’ plans for borrowing and it seems increasingly likely that she will have to either cut spending or increase taxes.

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This article is provided for general information purposes only and should not be construed as personal financial advice to invest in any fund or product. These are the investment manager’s views at the time of writing and should not be construed as investment advice. The opinions expressed are correct at time of writing and may be subject to change. Capital is at risk. The value and income from investments can go down as well as up and are not guaranteed. An investor may get back significantly less than they invest. Past performance is not a reliable indicator of current or future performance and should not be the sole factor considered when selecting funds.