WeeklyWatch – Bond yield levels affect inflation

14th January 2025

Stock Take

Lingering concerns about inflation and the pace of interest rate changes pushed up UK government borrowing costs last week, striking multi-decade highs.

Bond yield behaviour

Since September 2024, when the US Federal Reserve started to cut interest rates, global bond yields have been on the rise. And American inflation is showing to be more resilient than expected, with initial hopes for a quick return to lower interest rates now fizzled out.

Consequently, 30-year UK gilts saw yields hit highs not seen in 27 years, and 10-year gilt yields reached 2008 levels.

Hetal Mehta, Head of Economic Research at St James’s Place, says that the rise in gilt yields has been mostly driven by global factors. Because of stubborn inflation and wage growth in the UK, it’s made it harder for the Bank of England (BoE) to make aggressive cuts to policy rates. She states:

“The domestic upshot is that higher cost of debt will reduce already limited fiscal headroom. For the Chancellor, the options are limited, especially given that the optimistic growth forecasts from the Office for Budget Responsibility (OBR) look increasingly unrealistic. Raising taxes would be politically difficult, but cutting spending risks further slowing growth. It’s a tough balancing act with no easy solutions. This policy ‘catch-22’ may have exacerbated daily market moves beyond what global factors might imply.”

Tech key to UK turnaround?

The Labour government now faces further added pressure. Over the weekend, it’s been reported that Prime Minister Keir Starmer is placing hope on artificial intelligence (AI) to encourage UK growth.

At the end of March, Chancellor Rachel Reeves will reveal her Spring Statement, which will include updated OBR economic and fiscal forecasts.

Fixed Income Portfolio Manager at Schroders James Ringer offers his insight on what could help ease the situation. He states:

“There are two main catalysts for a turnaround in the current market conditions: intervention or lower inflation data. Intervention could originate from the UK Treasury or the BoE. On the Treasury side, verbal intervention is likely the first step. The Chief Secretary to the Treasury recently reiterated the government’s commitment to the fiscal rules, but did not provide further details.”

UK market flat despite gilt rise

Gilt issues may have been prevalent this week, but the FTSE 100 remained fairly flat last week, with a weaker pound assisting exporters.

The headline figure concealed a range of results. Housebuilder companies have been under pressure since the reveal of the Autumn Budget as buyers are struggling with possible higher funding costs and increased job uncertainty.

US equity feeling the pressure

There was a stall in US equity markets when the strong jobs data was unveiled on Friday and subsequently diminished expectations of US interest rate cuts later in the year.

The US tech companies that dominate US indices took quite the hit from this. NASDAQ dropped by 2.3% and the S&P 500 fell by 1.9% over the week, with the latter now having lost nearly all the gains it made in the immediate aftermath of the 2024 US Presidential election.

On Friday, the Bureau of Labor Statistics revealed that last month expectations were exceeded when 256,000 jobs were added, and unemployment fell to 4.1%.

Does this change things for the Federal Reserve?

With the job market remaining fairly stable, the Federal Reserve can enjoy the benefit of being more patient with further interest rate cuts this year. Economists will be keeping an eye on the inflation data being revealed this week for an indication as to how it will alter future decisions for the Federal Reserve.

Across Europe and Asia

In mainland Europe, the MSCI Europe ex UK rose 1.2% on expectations of an interest rate cut being put in place by the European Central Bank later in the month.

And in Asia, the Nikkei 225 retreated by 0.5% and the Shanghai Composite retreated by 0.2%. The Nikkei 225’s fall came about as a result of the speculation surrounding the Bank of Japan’s plan to hike up rates, whereas the Shanghai Composite fell as a result of deflationary pressures reflected in the latest Consumer Price Index and Producer Price Index releases.

Wealth Check 

What legacy do you want to leave for your loved ones?

Whether you own a business, are an employee or are retired, it’s a question that many of us ponder but seldom think through thoroughly – even though we find a lot of our clients have strong opinions on the subject! Being time-poor is a particularly potent issue for entrepreneurs, who spin a lot of plates on a daily business.

Find the time to plan

Even though business directors are busy people, it’s important that you put time aside to put a thorough plan in place that will ensure your wishes are carried out.

Before considering the practicalities, it’s worth thinking carefully about the type of legacy you want to leave behind. This is an important part of forming the financial planning process, something which our financial advisers can assist you with.

Managing assets

Business owners also face the extra complexity of having to consider what happens to their business and personal assets and must create a strategy that incorporates both.

Passing the baton

You may want to relinquish some control during your lifetime, possibly by passing the business over to a family member. But they may not have the aptitude or interest to take it on, so you’ll need to consider your succession planning – both at the retirement stage and in the event of your death before reaching retirement.

Selling on and moving on

If it’s part of your plan to sell the business, there needs to be a lot of consideration as to how and when you’ll do this, and to which person you sell it on to. What you do with the proceeds will also need to be considered carefully as you could end up with a large lump sum that will become a big part of your personal wealth.

Legally verified

Finances make up just one part of legacy planning. Legal and business tax advice is also extremely important when making your decisions. A financial adviser, a lawyer and an accountant are the three key professionals you want in your corner and all moving in the same direction.

Tax laws are constantly changing, your personal circumstances may vary from time to time, and new and unexpected business opportunities could arise. It’s therefore crucial to review everything on a regular basis.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

In The Picture

Markets face unexpected changes all the time. The post-election period can be an uncertain time for markets as the graph demonstrates, but there are always opportunities to be taken…

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The Last Word

“This country deserves a real choice in the next election and it has become clear to me that if I’m having to fight internal battles, I cannot be the best option in that election.”

– Canadian Prime Minister Justin Trudeau announcing his resignation, in advance of elections due later this year.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

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SJP Approved 13/01/2025