Gregoire Pesques, CIO Global Fixed Income & Head of Aggregate Strategies at Amundi, has provided insight on UK finances following the Spring Budget.
In the UK the day started very well with some good news on inflation, which was all the more reassuring as inflation has proven to be sticky in many other countries. We immediately had a good rally in the UK rates with the short end outperforming as it gives the Band of England more room to cut rates and it may help tilt the MPC to be more dovish
The highlight of the day was supposed to be the Spring Statement from Rachel Reeves. We were not expecting much, and we got given very little. The government is buying time, being reactive and not really proactive. We are now in the same position as we were 6 months ago. I was expecting the market to be a bit disappointed, and it was, with the 30-year gilt yield increasing above 5.4%. The DMO saved the day as it announced fewer Gilt issuances at £299bn.
This level of intraday volatility is sending a strong signal to the government that investors are nervous and need to be convinced about the value and quality of UK gilts. We are in a world where supply will increase and governments will compete to attract investors; Germany, a real AAA country, just announced a massive fiscal plan, meanwhile the UK is trading today at a discount.
Given where rates are globally, I like being long gilts, but more convincing actions from the government are needed to attract more investors and for rates to perform.
