Sharing his analysis of last week’s budget and today’s Trump election win, Rathbones Asset Management’s Head of Fixed Income, Bryn Jones, looks at the impacts on Fixed Income markets saying:
“Well, Trump has won. If we look at the Senate, that race is also increasingly looking like its heading that way too. As a result, the Dollar is strong, risk markets are taking another leg higher and US treasuries are having a bit of bath. Treasuries rallied yesterday as investors wrongly cheered a Harris win. That has completely reversed overnight, and some with yields having first fallen 7 or 8 basis points yesterday, have subsequently risen 17 basis points.
“But what we cannot afford to miss is that the gilt market continues to struggle …
“The massive increase in borrowing costs since last week’s Budget has wiped out all of Reeves’ fiscal headroom. The result of the massive increase in costs means no ability to spend, more tax hikes and, as a result, possible spending cuts! The Government needs to think now how to stabilise this gilt market.
My “Dear Rachel and Keir” message is this:
“The gilt market has been weak. Whilst some of that is due to global factors, most of the move is driven by the Budget and extra borrowing. If yields rise any further from here, you will have destroyed all the extra fiscal headroom through an increase in borrowing costs. Mind your eye on that. Maybe make some comments on how borrowing will only be done if certain KPIs and milestones are met, or you might find you are chucking good money after bad. Anything you can do to stabilise your borrowing costs, would be welcome for all. Just don’t trash the gilt market. It’s called gilt-edged for a reason!
“And as if to make the point, the UK 10-year auction was weak yesterday with bid to cover at just 2.81 times. So, not a good time for gilt investors this last two months.
“Finally, also keep an eye out for fallen angels… 2025 is the year where a lot of high yield companies have to refinance. With higher base rates this is going to be a struggle for some. This could be the first year since 2020 where fallen angels are greater than rising stars.”
