Chancellor Rachel Reeves’ first Autumn Budget caused quite a stir in the UK government bond (gilt) market.
In the first half of her speech, the 10-year gilt yield fell, but then quickly rose as Reeves unveiled the Labour government’s borrowing plans.
Gilt yields have been rising since mid-September (meaning prices have been falling).
There have been a few reasons for this, and the looming Autumn Budget was one of them.
The uncertainty surrounding Labour’s first Autumn Budget made bond investors nervous. Expectations of higher future borrowing in particular weighed on sentiment towards the attractiveness of UK government debt.
Much of what was announced in Wednesday’s Budget had in many ways been highly telegraphed, meaning bond markets had priced in much of the potential impacts.
This meant that leading up to the speech on the day, bond yields fell (and prices rallied).
But once detail of the changes to the ‘fiscal rules’ emerged (used to calculate how much future spending is allowable became apparent), alongside increases to future spending plans, it was clear that future borrowing will have to increase.
And this meant gilt yields rose.
This article isn’t personal advice. If you’re not sure if an investment’s right for you, ask for financial advice. Yields are variable and are not a reliable indicator of future income, and no income is ever guaranteed. Past performance also isn’t a guide to future returns.
Why did this cause gilt yields to spike?
However you cut it, more spending usually equals more borrowing. And more debt usually means a higher cost of debt.
The reason this happens to governments is the same as it is for individuals.
If you borrow £10,000 from the bank today, then go back in 2 months' time and ask for another £10,000, it's likely they'll charge you a higher interest rate on the second £10,000 loan.
It's not possible to just keep borrowing without any impact on the cost of debt.
Where are gilt yields now?
At the time of writing (31 October), the 10-year UK gilt yield is sitting at around 4.4%, having risen from around 3.75% at the recent lows in September.
This is a big move, however it’s still not as big as the move we saw after the Truss/Kwarteng mini-budget of September 2022 – yields rose from around 3.3% a couple of days before it, up to around 4.5% a couple of days afterwards.
While the Budget has caused a rise in gilt yields, there are other factors that continue to impact yields too.
What else is affecting gilt yields?
The biggest impact is still around interest rate expectations. And not just in the UK, views about what’s going to happen across the pond remain highly relevant.
US Treasury yields have also been on the rise since mid-September.
Concerns there around the future direction of interest rates, as well as the potential impacts of a Trump clean sweep in the US Election, have caused some jitters in bond markets.
However, with the 10-year gilt and US Treasury yields both still comfortably above 4%, bonds are broadly as attractive today as they’ve been all year.
Taking a long-term view, it’s likely that yields will be lower than 4% in future. That means investing in bonds today gives the potential for capital gains as well as receiving the income that they provide.
Remember though, all investments and any income from them can rise and fall in value, so you could get back less than you invest.
Want to buy bonds? – 3 fund ideas
Investing in these funds isn’t right for everyone. Investors should only invest if the fund’s objectives are aligned with their own, and there’s a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.
For more details on each fund and its risks, use the links to their factsheets and key investor information.
Legal & General All Stocks Gilt Index Trust
This fund looks to track the broad movement in prices of all gilts currently in issue.
It’s a low cost and easy way to invest in lots of different gilts at the same time. And also a great option for portfolios looking for specific exposure to gilts.
However, while it invests in lots of different gilts, funds that just invest in one type of investment can increase concentration risk. That means they should only form a small part of a well-diversified portfolio.
As there are only a limited number of gilts available to invest in, the performance of each individual gilt can have a bigger impact on the fund performance, which increases risk.
Please note charges can be taken from capital, which can increase the yield, but reduces the potential for capital growth.
Annual percentage growth:
31/10/2019 To 31/10/2020 | 31/10/2020 To 31/10/2021 | 31/10/2021 To 31/10/2022 | 31/10/2022 To 31/10/2023 | 31/10/2023 To 31/10/2024 | |
|---|---|---|---|---|---|
Legal & General All Stocks Gilts Index | 5.41% | -4.97% | -21.67% | -5.84% | 5.36% |
IA UK Gilts | 5.93% | -5.05% | -22.60% | -6.18% | 5.60% |
Invesco Tactical Bond
Stuart Edwards and Julien Eberhardt invest flexibly, in all types of bonds.
They aim to provide some income and growth over the long term, with a focus on keeping losses during periods of market stress to a minimum.
Their focus on limiting losses has meant their fund has typically had less ups and downs than the wider market.
Their active management approach also means they can stay away from areas of bond markets they think could perform poorly, and means the fund is highly diversified.
We think this is a great option to invest in a fund with experienced managers who are able to take advantage of the opportunities that come from market volatility.
The fund invests in high yield bonds and derivatives, both of which add risk.
Annual percentage growth:
31/10/2019 To 31/10/2020 | 31/10/2020 To 31/10/2021 | 31/10/2021 To 31/10/2022 | 31/10/2022 To 31/10/2023 | 31/10/2023 To 31/10/2024 | |
|---|---|---|---|---|---|
Invesco Tactical Bond | 9.78% | 5.42% | -7.60% | 2.09% | 9.04% |
IA £ Strategic Bond | 3.21% | 4.39% | -13.81% | 3.21% | 11.89% |
Royal London Corporate Bond
Shalin Shah and Matthew Franklin focus on corporate bonds in this fund.
Most of the fund is invested in investment grade bonds, with some of the fund invested in higher risk, high yield bonds.
Their edge comes from deep analysis of individual bonds, looking for those that offer higher returns. This can lead them to invest in bonds issued by companies that could be considered higher risk than peers.
But the individual bond analysis conducted by the managers means they’re comfortable that any additional risk being taken is well rewarded.
We think this is a great option to diversify an investment portfolio focused on shares. However, the approach adopted by the managers does potentially make it higher risk than some peers.
The fund invests in unrated bonds, which adds risk.
Please note charges can be taken from capital, which can increase the yield, but reduces the potential for capital growth.
Annual percentage growth:
31/10/2019 To 31/10/2020 | 31/10/2020 To 31/10/2021 | 31/10/2021 To 31/10/2022 | 31/10/2022 To 31/10/2023 | 31/10/2023 To 31/10/2024 | |
|---|---|---|---|---|---|
Royal London Corporate Bond | 4.39% | 4.78% | -18.40% | 5.78% | 13.48% |
IA £ Corporate Bond | 4.64% | 1.12% | -18.06% | 3.51% | 10.00% |