Similarly, Amundi, which has €2.16 trillion ($2.36 trillion) in AUM, said in its October global investment views document that it had become “more constructive on U.K. government bonds” over the month, "given receding inflation."
The “potential for interest-rate cuts by the Bank of England is underpriced by the markets and (consumer price index inflation) is also getting less sticky. This makes us positive on U.K. bonds,” Group CIO Vincent Mortier and Monica Defend, head of Amundi Investment Institute and chief strategist, wrote in the document.
Legal & General Investment Management, meanwhile, has been constructive on gilts for a while.
“A lot of commentary on the gilt market centers on the prospects for additional issuance at the budget, but the price action remains dominated by the outlook for the Bank of England’s policy rates,” Chris Jeffery, head of macro strategy, said in an email.
“Gilts underperformed global benchmarks in Q3 as investors focused on the prospect of aggressive rate cuts in the U.S. and Europe and, so far, have outperformed in Q4 as attention has swung to U.K. inflation dropping below target," he said. As the fourth quarter unfolds, "we think the data will increasingly reveal that U.K. economic conditions are not terribly different from elsewhere in the G7, which should continue to support the gilt market.”
Jeffery said that investors “obsessing over fiscal risks with an eye on Oct. 30 are overlooking the economic fundamentals which have the most important bearing on prices.” The manager has about £1.1 trillion ($1.44 trillion) in AUM.
Royal London Asset Management, meanwhile, has closed its underweight position on gilts ahead of the budget, having noted the “significant underperformance of gilts on a cross-market basis vs. their global peers,” Craig Inches, head of rates and cash for the £169.3 billion manager, said in an email.
“On our assessment of the direction of travel for U.K. interest rates, we would conclude that gilts are now starting to look on the cheap side of valuations.”
Uncertainty over what’s in the budget announcement, and the subsequent implications for borrowing, “will mean that gilts potentially remain cheap until the outcome is known." The U.S. presidential election in November will also “determine the direction of bond yields in 2025.”
The money manager will assess the attractiveness of gilts and bonds in general after the election and U.K. budget. “On current valuations we see gilts as cheap, U.S. as fair value, Europe and Japan as expensive,” Inches added.
And RBC BlueBay Asset Management’s Neil Mehta, portfolio manager on the investment-grade euro aggregate bond strategy, wants “to see higher yields before even contemplating buying gilts outright.”
Gilts have underperformed Treasuries and German bunds over recent weeks amid leaked proposed fiscal announcements such as taxes, “so there is already a degree of pessimism built in,” Mehta said. “Rightly, there’s a lot at stake given it’s Labour’s first budget since 2010, not least its credibility to make good on manifesto commitments while keeping any additional borrowing to a minimum.”
Mehta’s advice to fixed-income investors is to focus on two key elements when examining Reeves’ budget: how much the gilt remit for the 2024/25 fiscal year will be revised upward, and “the impact of a tweak in the debt rule on medium-term growth.”
With debt interest to GDP at 4% for the U.K., and debt interest vs. revenues at more than 10%, “this is not sustainable given … (the U.K. has an) economy running a twin deficit. The U.K. needs a credible growth path going forward and this includes investment spending that improves the long-term growth potential to drive down debt service costs.”
Mehta said comparisons to the September 2022 gilts crisis “are largely overplayed. Primarily because a LDI-related gilt selling doom loop is no longer a concern, but also because headline inflation is much lower and institutions such as the OBR (Office for Budget Responsibility) are not being sidestepped. However, this doesn’t mean Labour should be complacent to a bond market with a history of toppling governments,” he added. RBC BlueBay is part of RBC Global Asset Management, which has $468 billion in AUM.
