Rachel Reeves, the Bank of England and the road ahead

Chris Wyllie, our Chief Investment Officer was recently interviewed by Citywire New Model Adviser about his thoughts on government debt and its role in investment portfolios. The full article is below:

Yields of close to 5% make gilts more attractive, says advice CIO

Rachel Reeves is under increasing strain as government borrowing costs reached their highest level in almost three decades on Thursday, but for advisers rising yields make UK government debt more enticing.

This week’s UK government bond selloff has made gilts more attractive to clients looking for regular income.

When bond prices fall, yields go up, meaning that regular payments to holders increase.

On Friday morning the 10-year gilt yield rose by 0.03% to 4.83%, a tick below its highest level since 2008. This has given chancellor Rachel Reeves a headache because it makes it more expensive to serve debt, but has made UK government debt a potentially appealing asset class.

Gilts have been viewed as ‘problematic’ for some time now, Chris Wyllie, chief investment officer at London-based advice firm Connor Broadly, told Citywire.

The firm has only been holding a maximum of ‘5% or 6% in even the most conservative portfolios’. But the recent yield spike has potentially made UK government debt more appealing for income investors when compared to US Treasury-inflation protected securities (TIPS).

‘With these yields picking up and getting closer to 5%, it becomes a more balanced debate, because of course there is a price for everything,’ Wyllie said.

Sterling slump?

What is good for income investors might not be good for the UK economy though.

Although he stressed the government bond sell-off was not confined to the UK, Wyllie is concerned there are hints of a future sterling crisis. He is worried that stagflation, a mix of high unemployment, low growth and rising inflation, will take hold.

‘That means the Bank of England is going to be in a quandary because it wants to cut rates to stimulate the economy but they have got this sticky inflation problem which binds their hands,’ he said.

‘You could then end up with them driving down the middle of the road, which amounts to lower real interest rates and weakens the currency.’

Sterling fell below $1.22 on Friday to reach its lowest level since November 2023. It was trading at $1.28 a month ago.

Wyllie said the chancellor’s headline Budget policy, a national insurance contribution hike for all employers from 13.8% to 15%, may fuel further inflation.

‘You’ve got a labour market which is running a bit hot in the US, but is cooling off a bit. Wage inflation there is higher than the Fed would like to see, but it’s not disastrous. The UK is quite different you have potentially got a 6.7% minimum wage increase coming through which will raise the base of the wage pyramid,’ he said.

‘So it is not just about people on minimum wage, it is about the people just above them who will also demand wage increases and comparable wage increases. I think we have got a real problem there.’