Rising fuel costs, widening crack spreads, diesel shortages, inflation fears, worries about fiscal deficits and Central Bank action/expectations have driven yields to levels not seen for many decades. The IMF and other similar institutions have warned about the level of deficits in developed economies whose balance sheets continue to deteriorate.

Central Banks Reinforce the Higher-for-Longer Narrative

US Treasury Secretary Bessent’s announcement of a $6billion bond buyback has not had the desired effect and the Treasury curve is now well over 5% from 5years out. The Federal Reserve hiked hawkishly and Warsh has established some credibility. Markets had expected a hike and to have not delivered would have unsettled risk assets. Try telling that to his boss, who incoherently commented via the usual channels, returning to Fed interference and pressure, and announcing that rates should be at 1%. The US economy is proving to be remarkably resilient in the face of everything, and equity markets have hit new highs amid strong economic numbers. 

Europe is in political turmoil and elections loom across the bloc. The German Chancellor Friedrich Merz has suffered some disastrous defeats (his word) as the AfD receive an unprecedented level of votes. France is in an even worse position as the far-right gain momentum and Bund/OAT spreads have hit levels over 100bp (although still well below the Eurozone sovereign debt crisis wides of 190bp). The ECB delivered an expected 25bp hike and there are probably more to come.

The BoJ joined in as well with a hike and we are seeing JGB yields hitting levels not seen since their asset bubble popped in 1990. 10Y JGB’s were at 8% then and declined steadily throughout the 90’s, hitting 3% in 1996, currently they stand at 3.08%.

The BoE stayed on hold at 6-3 but recent commentary has been hawkish. Gilts have had a volatile time and the 30year hit a new high of 5.93%, down over 10% ytd. The fiscal outlook for the UK is fragile and the Chancellor (whose headroom is evaporating) looks ready to hike our tax burden in next months’ Budget when we also get the OBR’s borrowing predictions, for what they are worth. UK borrowing in the first 5 months of the fiscal year is over £77bn, £8bn more than the OBR profile.

‘Yields in Sterling are extremely attractive’

Primary Issuance returned with a vengeance across all currencies after the summer lull. Sterling saw £3bn in 3 days from good quality names and the market absorbed it comfortably with precious little selling in secondary to fund it. We also saw a Sterling deal from Amazon raise £4.25bn from a book of over £12bn and it has performed reasonably well in the secondary market. All in yields in Sterling are extremely attractive.
 

The above article has been prepared for investment professionals. Any other readers should note this content does not constitute advice or a solicitation to buy, sell, or hold any investment. We strongly recommend speaking to an investment adviser before taking any action based on the information contained in this article.

Please also note that the value of investments and the income you get from them may fall as well as rise, and there is no certainty that you will get back the amount of your original investment. You should also be aware that past performance may not be a reliable guide to future performance.