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The Bank of England has patched up the UK’s government bond market after the chancellor’s latest fiscal plan sent gilts plunging out of control, but whatever happens after that support runs out, some big investors say they are reluctant to buy the country’s debt again.
In a highly unusual measure to safeguard financial stability, the BoE is offering to buy a maximum of £5bn of government bonds a day until October 14 to contain a sell-off sparked by Kwasi Kwarteng’s “mini” Budget on September 23. Within days, the sell-off had became increasingly violent as it kicked off a liquidity crisis at thousands of pension funds and rattled around other parts of the financial markets.
Investors agree that this support will almost certainly keep a lid on any further volatility for now. But the episode has dulled longer-term attraction of UK government debt right at the point at which the government needs investors to step up and fund its fiscal plans. The UK Debt Management Office plans to sell £134bn of gilts by the end of March, an increase of more than £60bn from before Kwarteng’s announcement.
“We’re going to be much more reluctant to put on big trades in gilts any more,” said Christian Kopf, head of fixed income at Union Investment, a €416bn fund manager. “It has become an unpredictable market with populist policies. Even if the Bank of England has [fixed the plumbing] you are still left with an inconsistent fiscal policy.” The UK will need to offer up investors higher returns to sell its debt, raising the cost of borrowing for the government, he said.
The immediate risk for the market is a cliff edge when the BoE’s emergency intervention ends later this month. Unless the government has soothed market nerves by then, or the BoE extends the programme, that is likely to spark a renewed slump in gilts, investors say.
Kwarteng’s plan to outline a medium-term fiscal plan on November 23 could come too late to prevent further chaos.
“Liz Truss is out there trying to defend an unfunded budget,” said Luke Hickmore, a fund manager at Abrdn. “Fine, but we need to see an [Office for Budget Responsibility] report and we need to see it ideally before the end of the Bank’s current QE programme in two weeks’ time, not at the end of November.”
Prime minister Liz Truss and chancellor Kwarteng on Friday met the OBR, the UK’s official forecaster, in a bid to convince markets they are serious about bringing the country’s debt under control.
Another dent to the market could come in the form of a downgrade of the UK’s credit rating. Moody’s has already warned this week that large unfunded tax cuts threaten the government’s creditworthiness.
“The question is not will there be a downgrade, it is how many notches,” saidthe European head of a large global bank. The UK’s credit rating currently stands at Aa3 with Moody’s and AA with rival S&P. The banker said that a fall into single-A territory could cause some foreign investors — who own roughly 30 per cent of the gilt market — to sell their gilts.
“I think a downgrade looks completely inevitable at this point, although it sometimes takes a while for the rating agencies to act,” said Mike Riddell, a portfolio manager at Allianz Global Investors.
The country issues debt in its own currency, meaning a default is extremely unlikely, but the broader point is around the credibility of UK policymaking.
“The UK has devalued its credibility,” said Quentin Fitzsimmons, a senior portfolio manager at US asset manager T Rowe Price. “I have been in the market a long time and the most important thing is transparency and institutional credibility.” Fitzsimmons said he has been running an underweight, or negative position on UK debt since the summer, but the lack of an audit by the OBR ahead of the “mini” Budget was a red flag. “An audit is what I expect as an investor,” he said.
Some investors are also concerned about apparent inconsistencies in policy. The BoE’s new bond-buying scheme specifically targets the strains that were testing pension funds, but it also resembles the so-called quantitative easing programmes it ran after the financial crisis to stimulate the economy, which it had only recently announced it would reverse. At the same time, it is already raising interest rates to douse inflation and has said the government’s new fiscal plan will demand aggressive further tightening.
“They have to do something to give the feeling that the two authorities are not acting counter to each other,” said Niall O’Sullivan, the chief investment officer of multi-asset strategies at Neuberger Berman.
FAQs
BlackRock Inc., the world's biggest asset manager, is warning investors of the risk UK political parties will promise much greater spending in a bid to win this year's election, potentially sparking a revolt in the bond market.
Why have UK government bonds dropped? ›
Volatile gilt prices during the past two years have resulted in the ownership of UK government bonds by private investors to drop to their lowest level since 1996.
Are UK government bonds a safe investment? ›
UK Government bonds are typically viewed as one of the 'safest' forms of bond. That's because the government usually has significant influence over its currency, so can print more money to pay back investors if it needs to.
What is the bond outlook for the UK? ›
According to our latest forecasts, we now expect UK and global ex-UK (GBP hedged) bonds to return around 4.9% and 5.0%, respectively, on an annualised basis over the next decade, compared with our previous 10-year annualised forecasts of 1.3% and 1.3%, respectively, before the rate-hiking cycle began.
What happened to BlackRock in 2008? ›
2008. Amidst the financial crisis, the Head of the Federal Reserve Bank of New York asks BlackRock to analyze Bear Stearns' mortgage-backed securities assets and determine their value. BlackRock plays a key advisory role to institutions across the globe seeking to navigate the financial crisis.
Who is behind BlackRock investments? ›
Larry Fink is the founder, CEO and chairman of powerhouse investment management firm BlackRock, one of the world's largest asset managers. He and seven partners founded BlackRock in 1988. Originally it was part of The Blackstone Group. BlackRock was spun off from Blackstone in 1994 and went public in 1999.
Why are UK bonds doing so badly? ›
Frederic Tache, head of fixed income at St James's Place, says the major driver of volatility in the bond markets this year has been investors moving to shorter-duration assets to protect against inflation, “and this means the bonds of even quality companies have sold off”.
Will UK bonds ever recover? ›
We expect UK bonds to deliver annualised2 returns of around 4.4%-5.4% over the next decade, compared with the 0.8%-1.8% 10-year annualised returns we expected at the end of 2021, before the rate-hiking cycle began.
Who buys the most UK government bonds? ›
UK government bonds - known as "gilts" - are normally considered very safe, with little risk the money will not be repaid. Gilts are mainly bought by financial institutions in the UK and abroad, such as pension funds, investment funds, banks and insurance companies.
What is the safest bond to invest in UK? ›
You can choose from a government or corporate bond. Government bonds, also known as gilts, are low risk and are generally considered safer than corporate bonds, so you'll likely get a lower rate in comparison.
Interest paid by a gilt is taxed as income. Any capital gains, however, are tax free. If you sell at a capital loss this can't be used to offset other gains. You also don't pay any stamp duty or stamp duty reserve tax when you buy a gilt.
What is the safest government bond to invest in? ›
Treasury securities like T-bills and T-notes are very low-risk as they're issued and backed by the U.S. government. They provide a safe way to earn a return, albeit generally lower than aggressive investments.
How are UK bonds performing? ›
When bond yields increase, their prices fall and government bonds have lost a lot of value since the start of 2022. As an example, the average total return of the IA UK Gilts sector from 31 December 2021 to 31 October 2023 has been -27.61%. We've seen rates rocket from near zero to 5%.
What are the predictions for bonds in 2024? ›
In line with the outlook from other investment providers, the firm is forecasting a 5.7% gain in 2024 for U.S. investment-grade bonds, versus 4.9% last year and 2.3% in 2022. (All figures are nominal.) Schwab's 10-year return expectations are well below each asset class' returns from 1970 through October 2023.
How to buy UK bonds in the US? ›
Corporate Bonds
Generally, the best, most accessible way to buy a bond issued by a U.K. company is on the secondary market through an online broker. Most brokers offer a wide selection of corporate bonds. They'll typically list the coupon, the day the loan is due to be paid back, and the price.
What risk is faced by a US life insurance company that buys British government bonds? ›
For a U.S. life insurance company buying British government bonds, if the British pound depreciates (declines in value) relative to the U.S. dollar, the dollar value of the cash flows will be proportionately less. This risk is referred to as foreign exchange risk.
What is the BlackRock asks UK wealth firms to pilot share voting program? ›
Pedestrians walk past BlackRock Inc. headquarters in New York. BlackRock Inc. is experimenting with a program that would give a larger number of end investors voting power at shareholder meetings.
What companies does BlackRock have controlling interest in? ›
Latest Holdings, Performance, AUM (from 13F, 13D)
Actual Assets Under Management (AUM) is this value plus cash (which is not disclosed). BlackRock Inc.'s top holdings are Microsoft Corporation (US:MSFT) , Apple Inc. (US:AAPL) , NVIDIA Corporation (US:NVDA) , Amazon.com, Inc. (US:AMZN) , and Meta Platforms, Inc.
Is it a good time to invest in BlackRock? ›
BlackRock Inc currently has a 2.6% dividend yield. There is a neutral fundamental outlook for the investment management and fund operators' sub-industry. The long-term outlook is relatively healthy due to aging populations.
