By Harry Robertson
LONDON (Reuters) – Britain’s finance minister Rachel Reeves will deliver the first budget of the new Labour government on Wednesday, two years after then-Prime Minister Liz Truss’ tax-cutting plans sparked a crisis in the bond market.
Bond prices fell last week on reports Reeves would tweak the country’s fiscal rules to allow more borrowing, but several asset managers, including Pictet and abrdn, reckon they could rebound once the full budget details are known.
Here’s what 10 bond fund managers and strategists are saying:
ABRDN’S MATTHEW AMIS
“Overweight UK gilts versus other developed market government bonds.”
“Inflation is well below the Bank of England’s forecasts,” said Amis, who manages the global government bond fund and UK government bond fund. “Despite the negative headlines around the UK budget, we think its bark could be worse than its bite.”
ALLIANZ GLOBAL INVESTORS’ RANJIV MANN
“Long gilts” – a view that prices will rise and yields fall.
“Ultimately, the UK government has little choice but to have a relatively tight fiscal stance in the upcoming budget and maintain policy credibility after the Liz Truss budget debacle in late 2022,” said Mann, senior portfolio manager in core fixed income.
BNP PARIBAS ASSET MANAGEMENT’S CEDRIC SCHOLTES
“The UK is one of our preferred markets.”
“While we anticipate the Chancellor to take advantage of the increased fiscal headroom from a recalibration of policy rules, we think HM Treasury will be mindful that increased borrowing not be excessive and (that it is) focused on financing investment,” said Scholtes, head of global sovereigns, inflation and rates.
LAZARD ASSET MANAGEMENT’S MICHAEL WEIDNER
“A near-neutral stance… will reassess after the budget is released.”
“We believe that the new budget will ultimately signal a robust level of fiscal responsibility,” said Weidner, co-head of global fixed income. “The persistent inflation, particularly in the service sector, and its impact on the BoE’s reaction is our primary concern.”
LEGAL & GENERAL INVESTMENT MANAGEMENT
“Biased to be positive on gilts relative to other G10 markets.”
“We think the data will increasingly reveal that UK economic conditions are not terribly different from elsewhere in the G7,” said Chris Jeffrey, head of macro strategy. “Investors obsessing over fiscal risks with an eye on Oct. 30 are overlooking the economic fundamentals.”
M&G INVESTMENTS’ BEN LORD
Long gilts but “conservative” and “cautious”.
“The change to the fiscal rule appears to free up 50 billion pounds ($65 billion) over the government’s term,” said fund manager Lord. “While this figure is significant, it should be viewed in the context of the market’s expectations for gilt issuance, which is approximately 300 billion pounds annually or 1.5 trillion pounds over the government’s term.”
PICTET ASSET MANAGEMENT’S LINDA RAGGI
“Long duration position on gilts.”
“We have recently initiated a long duration position in gilts, taking advantage of more favourable valuations,” said Raggi, senior investment manager for fixed income. “We believe the budget will be focusing on supporting growth and don’t foresee it to be a very volatile event.”
PIMCO
“We continue to like UK government bonds.”
“We think that the terminal rate that’s priced into financial markets looks high relative to our expectation and that inflation will continue to ease,” said Peder Beck-Friis, senior vice president and economist.
UBS ASSET MANAGEMENT’S JON GREGORY
“Long gilts.”
“The UK has among the highest developed market bond yields but with a growth outlook that is more challenged than the U.S.,” said Gregory, head of UK fixed income. “Clearly there are some nearer-term risks to gilts if the budget brings a lot more supply, but we do not expect the extreme volatility that followed the Liz Truss mini-budget in 2022.”
VANGUARD’S ALES KOUTNY
“Underweight UK bonds” – a lower holding relative to the benchmark against which performance is measured.
“We think markets are underpricing the strength of the UK economy,” said Koutny, head of international rates. “Unless you have a UK benchmark or you have to engage with gilts, most market players, as we are seeing, are just stepping aside and waiting for the budget to get out of the way.”
($1 = 0.7699 pounds)
(Reporting by Harry Robertson; Editing by Christina Fincher)
