Bond Watch: gilt yields at 4.5% again – here's why
Sam Benstead breaks down the latest news affecting bond investors.
22nd November 2024 12:49
Welcome to interactive investor’s ‘Bond Watch’ series, covering the latest market and economic news – as well as analysis – that is relevant to bond investors.
Our goal is to make the notoriously complicated world of bond investing simpler, by analysing the week’s most important news and distilling it into a short, useful and accessible article for DIY investors.
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UK inflation and yields rise
UK inflation rose this week, hitting 2.3% on an annualised basis to October. This was ahead of expectations and the 2% Bank of England target.
Higher inflation is bad news for bonds as it means the central bank will be more reluctant to cut interest rates. This leads to a repricing of bonds, with prices falling to increase existing market yields.
The 10-year gilt now pays 4.46%, up from 4.2% a month ago. Yields have risen across different maturity levels and are back to where they were in the summer of 2023.
Two-year gilts, which are popular with ii customers looking to lock in a fixed return by holding gilts to maturity, currently pay around 4.4%. The longest bonds, maturing in 30 years, pay nearly 5% on an annualised basis if held to maturity.
Inflation was driven higher in October by a number of factors. These include higher energy prices, rises in some goods such as cars and furniture, as well as rents.
However, Deutsche Bank says that the latest data does not point to a change in the underlying inflation story, particularly with lingering uncertainties around future price dynamics.
Nevertheless, it has made adjustments to its forecasts due to the Autumn Budget.
It said: “We update our projections for the employer National Insurance contribution hike. We expect this to start feeding through into the price data from January 2025, with the price adjustment expected to be largely complete by Q2 2025. Based on our modelled estimates, we see CPI/RPI rising by near 0.3 percentage points in 2025, as firms reflect both increases to the National Living Wage and hike in payroll tax – hitting retail and services prices.”
Gilts on the blockchain?
The UK government has revealed that it will trial a “digital gilt” using “distributed ledger technology”, better known as blockchain, which is the technology that underpins the ownership of many cryptocurrency assets.
It said this would “demonstrate the government’s commitment to innovation in the financial services sector”.
Likely to appear within two years, it is an attempt from the new government to innovate in financial markets and show that the UK is a leader globally in the space. If successful, it could make gilt trading cheaper and faster.
There have been noises from the World Bank and European Investment Bank about issuing debt on the blockchain, but the technology has yet to take off for debt markets.
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