9 January 2025
If you are covering the latest news in financial markets, please see the following comment from Lindsay James, investment strategist at Quilter Investors:
"A confluence of events has seen UK gilt yields hit a range of highs in the last 24 hours, with the 10-year yield touching 4.79%, the highest level since the GFC, and the 30-year yield at 5.35%, the highest level since 1998. In part, this move is shadowing a rise in US bond yields, driven by signs of a still strong US economy alongside indications of persistent inflation that are prompting investors to review expectations for two rate cuts in the year ahead.
"Term premium, the additional yield investors demand for lending long-term money, has also been on the rise, with one factor being the pure level of uncertainty around the future path of inflation and the productive potential of the economy. However, a key factor remains the sheer size of the bond sales by both the UK government and the Bank of England that foreign investors typically mop up.
"With the Bank of England reducing its Asset Purchase Facility to the tune of £100bn/year as part of its reversal of QE, alongside the government's hefty bond issuance that will push towards £300bn this fiscal year, the abundant supply of bonds also appears to be driving up yields at a time when the economy is showing cracks.
"Whilst this will undoubtedly cut into Rachel Reeves' already limited budgetary headroom, the likelihood of further tax rises in the coming months seems slim. There are already clear indications that corporates are responding to her decision to raise NI on employers by both raising prices and cutting headcount, pushing the UK further towards stagflation, whilst the recent flatlining of the economy will underline the clear risk from yet another round of tax rises.
"Spending cuts feel like the more likely outcome, with the Treasury declaring yesterday that meeting the fiscal rules remains “non-negotiable.” With public services already struggling and the investment budget seen as the source of future growth, the decision of where cuts could fall will be crucial. However, wherever the cuts may fall, her goal of raising economic growth has just become that bit harder."
