Fund manager sees ‘generational opportunity’ in this bond market
Government bond markets have been in focus this week, as several long-dated yields hit multi-decade highs — which, one fund manager says, presents a “generational opportunity” in the U.K.’s gilts. The U.K. 30-year yield hit 5.723% on Tuesday, its highest level since 1998, as the yield for the 10-year was at its most elevated since the start of this year, at 4.835%. The 2-year gilt yield has meanwhile eased from 4.379% in January to around 3.95%. “The term premium, so the yield you’re getting on the long end of the curve versus the short end, is exceptionally high, particularly in the U.K., and that means a lot of bad news is priced in,” James Carter, fund manager at W1M, told CNBC’s “Europe Early Edition” on Wednesday. Gilts have suffered severe spells of volatility in past years on both ends, from the 2022 mini-budget crisis under former Prime Minister Liz Truss , to the sharp spike in July , as questions swirled around Finance Minister Rachel Reeves’ future. A recent reduction in demand from British pension funds , which are paring back 30-year gilt holdings as they reach maturity, is adding to that choppiness. Gilt market volatility is “likely to remain high while sentiment is so low as it is today,” Carter said. “We need to try and look through that and look at the value opportunity on offer across government bonds, but particularly in markets such as the U.K. … and that is a screaming buy.” Carter noted the result of gilt auctions — which showed demand at a ratio of about three and a half that of issuance — painted a very different picture to some of the public discussion of the U.K. being in a crisis akin to that of the 1970s. At that time, the British pound collapsed and the country was forced to seek a loan from the International Monetary Fund . Bond vigilantes have made clear that they won’t tolerate the same kind of fiscal largesse from the U.K. that they will in economies such as the U.S. But the government has addressed this by repeatedly emphasising its fiscal rules , Carter said. “As soon as the bond market starts to believe that, and probably the autumn budget is another chance for them to send that message — that we are a safe pair of hands in a world where everyone else is pressing on that fiscal tap more and more — that could offer a bid for gilts,” he told CNBC. That would be compounded by a Bank of England decision to slow quantitative tightening, since it “doesn’t make any sense selling gilts when they’re down 50% from their highs in 2020,” Carter added. If the government “can continue to push the narrative that it’s not as bad as it seems … I believe there is a generational opportunity for investors to be buying government bonds at yields in real terms that are 2.5 to 3%.” Carter also stressed that he did not see the same opportunities elsewhere. Japan is unappealing from a real yield perspective , while the U.S. is in a gloomy fiscal situation and has an unremarkable long-term risk term premium which could be pushed up higher by U.S. President Donald Trump’s attacks on Federal Reserve independence and inflationary concerns, he argued. In the euro zone, he said Germany’s upcoming defense and infrastructure spending push would put pressure on bond yields. France meanwhile faces an inability to push through budget legislation and a public unwilling to accept the spending cuts or tax increases needed to change its economic fundamentals. In a Tuesday note, UBS strategists Giles Gale and Reinout De Bock called the U.K. “one of the most interesting rates markets for the 2025 run-in.” “The long end is cheap. It could also be risky — the budget could be an idiosyncratic risk and demand can be thin,” they said. “We think it is likely that the lack of headroom in the U.K.’s finances will prompt the need for additional taxation. It is clear to all that the market currently prices them to be either insufficient, not credible, or inflationary. The risk is that any hole will be plugged, and any fiscal drag is bullish rates.”
<
