While much depends on whether UK public finances really are stabilised after another tax-raising UK budget, the outlook appears relatively benign for gilts.

UK Chancellor of the Exchequer Rachel Reeves didn’t secure the kind of Autumn Budget media plaudits that the finance minister might at one point have hoped for, but as far as the gilt market is concerned, the fact that yields trade close to their lowest level this year is some consolation.

And if – and this is a big “if” – public finances don’t go dramatically off course, the gradual improvement in the deficit and debt situation might start to filter through into wider bond market consciousness. David Roberts (pictured below), head of fixed income at Nedgoup Investments, is cautiously positive.

A flurry of speculation about potential threats to the premiership of Keir Starmer, and concerns about Treasury “kite flying” of proposals about tax made for noxious political atmospherics before the 26 November Budget date. 

“For anyone who believes in the power of economics over politics in the longer term, the time to buy gilts was before the budget. We did,” Roberts told WealthBriefing in an interview. “We were double weighted ahead of the Chancellor’s statement. Post-Budget, the relief rally kicked off in earnest, all those naysayers rushing to cover underweight positions. The economic outlook – lower inflation, reasonable GDP – should favour gilts.”

David Roberts

On 14 January [2025], the yield on the 10-year benchmark gilt spiked to almost 4.9 per cent; after some volatility since, it fetched 4.42 per cent on 26 November – the Budget details were leaked an hour before – and has slightly backed up, to around 4.5 per cent as of the market close yesterday. 

Roberts, who runs the Global Strategic Bond Fund, which has just reached $230 million in assets under management, invests only in “core” bonds: government debt and investment-grade corporate bonds. This investment professional has worked in the financial sector for more than 35 years.

Four years ago, when interest rates were still ultra-low, Roberts decided to take his own money out of the bond market, because yields were so poor. The subsequent rise in rates following the pandemic persuaded him to get back in.

“You need a yield to preserve wealth in real terms,” he said. 

The picture is brightening for areas such as UK government bonds, Roberts said. 

UK consumer price inflation is around 3.6 per cent (October figure); it is expected to drift lower. The yield on a medium-maturity gilt (the 10-year is about 4.5 per cent) which means that with inflation heading down, the holder of the bond will get about 2 per cent. 

“We are getting paid about double long-term inflation expectations,” he said. “If you are getting paid what is the nominal rate of growth in an economy, then you are getting over-compensated [for holding bonds].”

Others seem to agree. at a presentation for journalists this week on its investment views, Brown Shipley said it favoured switching out of Japanese government bonds – profiting from their recent moves – and going into gilts. Japan is opening the fiscal taps, while in the UK, the direction is the other way. Back to Nedgroup’s Roberts – he is heavily underweight Japan.

Varied movements in different countries’ debt markets means that investors cannot treat fixed income as a homogenous mass and ride the market up and down. It is important to be nimble. 

“It [bonds] is a brilliant market for active managers at the moment,” Roberts said.

Softer US
Expectations that the Trump administration will push for a more “dovish” Fed chairman after Jerome Powell are underpinning short-maturity US Treasuries, Roberts said. (This week, the Federal Reserve cut rates by 25 basis points.)

Roberts is uninterested in owning any US debt beyond the 10-year maturity curve. One of his biggest underweight positions is in longer-dated Treasuries.

Europe is different, he said. “if anything, the ECB is under pressure to raise rates,” Roberts said.

The fund is close to neutral in relation to its benchmark when it comes to weightings of eurozone bonds, with exceptions of German debt, where it is more positive, and some corporate bonds.

In some countries, such as Denmark and Italy, it appears that they are likely to cut some of their public debt, Roberts said.

By the end of 2027, most developed countries’ budget deficits as a share of GDP will be at 3 per cent – the old Maastricht criteria for forming the single currency. By contrast, the US is slated to be up to 7 per cent. In the UK, it is expected to be about 3.6 per cent in 2026 and 3 per cent in the following year.