BNY Mellon IM weighs in on the #Budget2021 from a fixed income perspective

Howard Cunningham, portfolio manager, BNY Mellon Global Dynamic Bond Fund:

Following the example of (amongst others) the United States and India, the UK government has confirmed that austerity is so last decade, focussing on expansion now, with moves to improve the fiscal position more back-end loaded. It has also increased state intervention to facilitate the transition to a greener economy.

This has not greatly surprised bond markets; spending now in the hope that growth and future tax rises will eventually lead to a decline in Debt/GDP, will at the margin contribute to upward pressure on gilt yields and gilt supply; although the associated gilt issuance target for 2021/2 is towards the higher end of estimates at £295.5bn, it is still a far cry from this fiscal year’s expected £485.5bn, and bond investors won’t lose too much sleep over this, as long as inflation expectations don’t rise too much.

On inflation, it is a mixed bag; fiscal stimulus should add to the upward momentum, but cancellation of proposed excise duty increases and continuation of lower VAT rates on the hospitality sector will mean that base effects are less pronounced, while further support for the housing market will possibly increase the wedge between RPI and CPI. 5 year inflation breakeven rates have climbed about 0.4% so far this year, and added another 2b.p. or so as the Chancellor spoke.

The change to the Bank of England’s remit, requiring it to set policy reflecting the importance of environmental sustainability and the transition to net zero, plus confirmation that the DMO intends to issue a minimum of £15bn in new green gilts confirms that the state will play an active role in greening up the economy.

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