This week, the UK’s government bond markets have been thrust into the spotlight. Long-term yields have risen to levels not seen in the late 1990s.
James Carter, fund manager at W1M says that this dramatic rise in yields is a rare opportunity for investors to enter the market.
Carter, speaking to CNBC, described the current situation as a “generational chance,” especially in the UK’s gilts that are older, which he believes have been priced in an excessive amount of pessimism.
Why have bond yields reached record levels?
The yield on UK’s 30-year Government Bond briefly reached 5.723% on February 2nd – its highest level since 1998 – before easing a little later in the week.
This spike is a result of a number of factors, including persistent inflation concerns, a shift in monetary policy and waning institutional investor demand, such as pension funds.
The yields of shorter-dated gilts are also volatile, but they have fallen from their earlier highs in this year.
Carter attributes the steep yield to an unusually high term premium, the extra compensation that investors demand for holding longer maturitys.
“The term premium…is exceptionally high, especially in the U.K. and that means that a lot bad news is price in,” he said.
The implication of this is that investors are rewarded handsomely when they take on duration risk even though the market sentiment remains fragile.
Why UK’s Bond Market is Particularly Attractive
Carter believes that the UK is uniquely positioned in the developed markets, despite the fact that they are facing fiscal and monetary challenges.
Japan’s real yields are still unattractive. The US is facing mounting fiscal challenges, which are compounded by political insecurity and concerns about central bank independence.
In Europe, Germany’s planned spending surge and France’s legislative gridlock put pressure on sovereign debt markets.
UBS strategists recently echoed the sentiment, calling the UK as “one of most interesting rate markets for the run-up to 2025.”
The long end of the curve is undervalued, despite the fact that there are still risks, notably around budget credibility and thin demands.
The UK gilt market could be one of the most attractive fixed-income investments in recent years for investors who are willing to look beyond short-term noise.
Should you invest in UK bonds now?
Carter argues that despite recent turmoil, the fundamentals of the UK Bond Market are more resilient than headlines would suggest.
Carter also stressed the importance of fiscal credibility.
“As soon the bond market begins to believe that…we are a safe pair… that could bid for gilts,” said he, referring to the government’s commitment towards budget discipline.
Prices could be further supported by a possible slowdown in Bank of England’s quantitative easing program, especially considering how far gilts are down from their highs during the pandemic.
The UK bond market offers a rare opportunity for investors who are willing to look past short-term volatility.
This post Fund managers: UK Bond Market presents a “generational opportunity” in 2025 could be modified as new information becomes available
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