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BlackRock, Schroders and Fidelity International bought gilts during Wednesday’s sell-off, betting that the uncertainty over chancellor Rachel Reeves’ future would not trigger a deeper rout in UK government debt.
Gilts and the pound sold off sharply after Sir Keir Starmer declined to give his full backing to his chancellor, as investors fretted that her departure could lead to a loosening of fiscal rules and increased borrowing.
Ten-year yields climbed as high as 4.68 per cent on Wednesday, before recovering to 4.55 per cent on Thursday after the prime minister gave a stronger commitment that Reeves would stay in place. Yields move inversely to bond prices.
“We are ‘overweight’ the gilt market, we did add to that yesterday afternoon,” said Simon Blundell, co-head of European active fixed income at BlackRock, the world’s biggest asset manager.
He said the group took advantage of the sharp fall in bond prices to make a bet that gilts would outperform US Treasuries, in the belief that the market sell-off would not deteriorate into a rerun of the crisis that followed former prime minister Liz Truss’s ill-fated “mini” Budget in 2022.
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That episode triggered forced selling of gilts by pension funds, resulting in a market plunge that was only halted by Bank of England intervention.
Pension funds have since reduced their use of leverage, which Blundell said left less potential for a vicious circle of gilt selling.
The additional yield on 10-year UK bonds relative to US Treasuries of the same duration jumped to almost 0.4 percentage points at the height of Wednesday’s sell-off, the highest level since the global bond market slump in April.
UK asset manager Schroders also added to its gilt holdings during the sell-off, wagering that Starmer would be reluctant to oust Reeves for fear of provoking an even bigger market reaction.
“Yesterday we actually bought a few more gilts, thinking that there won’t be any follow-through [from Starmer to fire Reeves] because it’s so obvious that the market is going to back Reeves,” said Julien Houdain, head of global unconstrained fixed income at the group.
London-based Fidelity International also purchased long-dated gilts after the “aggressive yield curve steepening yesterday afternoon”, said fund manager Mike Riddell.
“We simply didn’t think that the Labour party could or would risk a completely avoidable gilt market implosion,” he added.
Wednesday’s market volatility followed Starmer’s decision to gut his controversial welfare bill to placate rebels within his party, leaving the government needing to find billions of pounds of tax rises or spending cuts to avoid an increase in borrowing.
“The wiggle room is very limited and the market will focus very clearly on whether the fiscal sustainability pathway is under threat,” said Sonja Laud, chief investment officer at Legal & General’s asset management arm.
Additional reporting by Ray Douglas
