Fears of UK gilt doom loop overblown - AXA IM

FEARS OF UK GILT DOOM LOOP OVERBLOWN - AXA IM

UK gilt yields may have come off multi-decade highs seen last month but they remain elevated. Fears that they are in a "doom loop" are overblown though, at least according to Nick Hayes, head of active fixed income allocation and total return at AXA Investment Managers.

"There remains this sense that gilts are incredibly challenged and stuck in a doom loop with 30-year bond yields moving higher and causing UK borrowing costs to rise."

He says such worries overlook a broader backdrop of rising long-dated gilt yields also seen in the U.S. and Japan.

"Look across the curve and the UK is not doing too badly at all compared to many other countries, particularly in Europe," says Hayes.

Last month UK 30-year gilt yields breached a 27-year high of more than 5.7% (GB30YT=RR).

"The 30-year gilt is not the most important bond out there – mortgages aren’t priced off them, nor does the government have to issue them. The Debt Management Office can just issue shorter-dated bonds like 10-year gilts, which it has done recently and seen very strong demand," says Hayes.

He said that while negative drama abounds, UK bonds are simply churning out reasonable returns without aggressive central bank policy acting as a tailwind.

"It's not the worst environment for bond investors even if it’s not super positive."

On credit, Hayes admits that ever tighter credit spreads are "slightly defying gravity."

"We’re in this sweet spot where the data is weak but not weak enough to push us into recession and more rate cuts are going to come, which will be supportive for risk assets."

While there is a healthy pipeline of credit and high yield, Hayes reminds that this is not 2006 or 2007 where "the market was partying like crazy" amid high leverage.

"If the economy remains not too bad and the supply-demand dynamic can stay strong, then we could see tight spreads for the foreseeable future," he said.

"If this is a party, it is a non-alcoholic one.”

(Lucy Raitano)

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