(Bloomberg) — Pacific Investment Management Co., Franklin Templeton and Fidelity International are among investors sticking to their bets on UK government bonds after this week’s slump, with some looking to buy more.
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Pimco, the world’s biggest bond investor, said it continues to take a positive view of UK debt, while Fidelity portfolio manager Mike Riddell said the retreat appeared to be driven by hedge funds rather than by traditional asset managers.
“We haven’t changed our gilts positions in this selloff,” Riddell said. While it was easy to blame the UK government, “it is mainly a global fixed income story,” he said. “We have a small long in gilts, with room to add if things blow up any more.”
Market sentiment toward the UK is brittle and optimism after Labour’s election win has dimmed amid flatlining growth, sticky inflation and a poorly received budget. While the declines this week came amid broader global concern about Donald Trump’s tariff threats, swelling debts and inflation, the milestones for UK assets were brutal nonetheless.
The yield on 30-year debt hit the highest since 1998 and the pound sank to a one year low, evoking memories of the meltdown during Liz Truss’s short-lived tenure in 2022. The Treasury was forced to issue a statement insisting it had an “iron grip” on the country’s finances.
But some of the world’s biggest investors and banks downplayed the moves.
Viewed over recent months, they said, the rise in UK yields is correlated with that of other countries grappling with the familiar challenges of persistent price growth and record bond issuance. Stumbling economic expansion means more interest-rate cuts are only a matter of time, which will put a floor under the gilt market, they said.
“Given the yield levels, I think it’s very attractive compared to other developed markets,” said David Zahn, head of European fixed income at Franklin Templeton. If anything, the Bank of England will deliver more easing because higher yields will “choke the economy off,” he said.
Why This Is Not a Liz Truss Moment For UK Right Now: QuickTake
Rout Abates
Already on Thursday the surge in borrowing costs was abating, with the 10-year yield end up only 2 basis points on the day. It was up three basis points at 4.84% as of 8:14 a.m. in London.
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Fund flows tracked by BNY — the world’s largest custodian bank — backed up investors’ willingness to look through the latest volatility. While institutional investors have been offloading more gilts in the early part of 2025, they remain well within selling ranges seen last year, the data showed.
What Bloomberg economists say…
“Surging gilt yields and a plunging pound have drawn comparisons with the financial meltdown that followed the mini-budget delivered during Liz Truss’s premiership in 2022. We think the parallels are limited so far. The selloff in global bond markets is the dominant factor now.”
— See the full note from economists Ana Andrade and Dan Hanson here.
Still, the volatility seen this week was a reminder that the case for holding UK government bonds is far from clear-cut. The debt has traced a rocky path since Labour’s October budget, which boosted spending, taxes and borrowing.
A Bloomberg index tracking gilt returns saw gains of almost 2% in the month after the budget, only to more than erase them in December. The gauge is down 1.8% this month compared with a 0.9% loss for the equivalent US index.
Orla Garvey, senior fixed income portfolio manager at Federated Hermes, closed her gilt position after the budget because the government failed to deliver the fiscal tightening she’d expected.
“The outcome left almost no fiscal headroom, which poses a significant problem in an environment of weak growth and higher yields,” she said. “This has made gilts susceptible to the kind of price action we are currently witnessing.”
–With assistance from Alice Atkins, Naomi Tajitsu and Greg Ritchie.
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