In a tough year for government bonds, gilts have been particularly weak. Could they revive in 2025?
- The IA UK Gilt sector down 1.4% for the year to date
- Interest rate expectations and the Budget have caused weakness
- Gilt yields have dropped from their peak
2024 has been another tough year for the gilt market. UK government bonds are one of a handful of asset classes to have lost money over the year, with the IA UK Gilt sector down 1.4% for the year to date (source: Trustnet to 4 Dec). The sector has had another difficult patch through the recent budget. Can investors hope for better in the year ahead?
All government bond markets have been weak through the year, as expectations on interest rate cuts have had to be pared back. However, the UK market has suffered more than most: inflation in the UK has been more persistent, and there have been wobbles around the new government. The gilt market even flirted with another ‘Liz Truss’ moment in September, while investors digested the impact of the Budget.
The UK bond market now has yields akin to those of the US, but growth akin to that of Europe. Equally, while money has poured into US and European bond markets, the UK has only seen a trickle in comparison. Perhaps more worrying, in the first gilt auction after the budget, the value of bids was anaemic, suggesting weakening demand for UK government debt.
However, there are signs that this is starting to change. Gilt yields have dropped from a peak of 4.56% at the start of November, to around 4.29% in early December . This suggests confidence may be returning to the market. Investors appear to have absorbed a rise in inflation from 1.7% to 2.3%, which was largely due to the increase in the energy price cap. Equally, while the Office for Budgetary Responsibility said the Budget could be inflationary, it has assumed no impact on wages or hiring from the increase in National Insurance.
Ben Edwards, manager of the BlackRock Corporate Bond fund, says gilts look better value than European or US government bonds. He says the sluggish growth in the UK should be good for bond markets, unlike in the US where Trump’s presidency has brought the prospect of higher inflation and faster growth. In Europe, yields are much lower and therefore don’t have the same appeal.
After a volatile year, the gilt market may be due some respite. It looks out of step with European and US markets, and could see a re-rating if buyers start to realise the value there. Will the bond vigilantes take note?
