BlackRock is ditching an overweight recommendation on U.K. bonds held since October, anticipating that concern over the country’s fiscal outlook will persist.
The world’s largest asset manager has turned neutral on gilts, saying it’s a good time to exit the debt after a recent rally, according to strategists from the BlackRock Investment Institute in a note. Yields on U.K. government bonds have slid in recent weeks after hitting multiyear highs in mid-January, on bets for faster easing from the Bank of England.
The BlackRock view runs contrary to many investors turning positive on gilts — shown by record orders of more than £140 billion ($173 billion) for the government’s latest bond sale on Feb. 11. Yet the gilt rally has run out of steam in recent days, with worries about the Labour administration’s fiscal situation, plus global uncertainty about the impact of US import tariffs on inflation and growth.
“We cut our gilt allocation to neutral,” wrote Jean Boivin and Wei Li. “Markets have moved closer to our view on Bank of England policy rates, and we think concerns about the UK fiscal outlook will linger.”
The strategists had moved to an overweight stance on U.K. bonds in October, expecting the BOE would slash rates faster than the market was pricing. Since then, gilts slid to drive yields to the highest since 2008, and despite the recent turnaround yields remain higher than in October.
Money markets are currently factoring in around 65 basis points of BOE easing by year-end. Traders have been upping bets for further cuts, after two policymakers voted for a jumbo half-point reduction at last week’s monetary policy meeting.
