Our views

Gilt corner: A President in hawk's clothing


Craig Inches, Head of Short Rates and Cash

26 January 2018

It’s not often that UK government bond markets are a dull affair. A constant stream of economic data and political news usually provokes some sort of excitement to boost one asset to the detriment of another. But as most of the world’s leaders descended on a medium sized European conference venue up a mountain, gilts tracked their global counterparts up and down with remarkable affinity, with few fireworks to be had.

Within our funds, we’ve continued building up to the forthcoming index linked syndication, selectively trading into overseas assets such as US and Canadian bonds, along with some moves into German index-linked assets.

The biggest news for bonds in the last week came out of the European Central Bank (ECB) meeting. On the face of it, the written statement yielded few surprises (sometimes the only change from one meeting to another is the date). But as social scientist Peter Drucker once remarked, ‘the most important thing in communication is hearing what isn’t said.’

At the press conference following the event, Mario Draghi’s refusal to row upstream into more dovish territory was enough to convince commentators and markets that he’d brought his hawking gloves this time around. The result was an almost unanimous sell off in European government bonds on Thursday, sending yields higher. As a result, German bund yields pushed towards their highest level in almost two years.

But despite the furore, in our view the President’s lack of dovishness (and apparently implied hawkishness) read like a page from central banking 101 for 2018. With UK GDP and wage growth coming in slightly stronger than expected last week and real wage growth expected by the summer, it wouldn’t be at all surprising if the Bank of England’s quarterly commentary strikes a similar tone at their next meeting.

The only thing which might hold the Bank back is sterling, with its recent rally (on a trade-weighted basis) has only recovered half of its fall after the referendu

In these quieter market conditions, we’ve also been examining a much bigger picture conundrum for bond investors. With global inflation expectations finally on the up, growth looking strong and a managed tapering of stimulus at the forefront of the agenda, a gradual rise in yields is something the market should be well accustomed to.

However, future interest rates, as implied by long dated forward rates, still remain stubbornly low. While the extraordinary measures deployed after the last financial crisis are finally being withdrawn, its impact on the long-term outlook for the economy lingers on for now.

The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.