Right. I didn’t want to do this, but we need to talk about gilts. Because in a week in which most market movements were all a bit “meh”, gilts (a.k.a. UK Government Bonds) stand out as having had an unusually dramatic run. What happened?! I hear you gasp. Well – hold onto your hats – on Thursday the UK’s 10-Year Gilt yield dropped by 0.13%!
Yes; you’re right. It is odd what passes for drama in the investment world. It’s hardly Cup-Final penalties, is it? This is why I avoid writing about gilts. It takes me back to the confusing days when I was learning my trade, sat next to grizzled professionals who’d take an apparently bland statement like that and read a Nabokov novel’s worth of meaning into it (I just nodded and kept quiet).
But today I grasp that nettle. Firstly the size of the move: It doesn’t sound like much, but when you start with not much, not much can make a big difference. And the gilt yield started the day at 1.11%, and dropped to 0.98%. That equated to a c.2% move in the gilt index over the day – the largest part of an almost 4% move over the week. Remember that bonds are supposed to be the tortoises to the hares that are shares (now there’s a Dr Seuss book just begging to be written). But UK equities only shifted by 0.9% on the week, a polarity reversal that tells you something unusual happened.
That was the size of move, now let’s talk direction. Yields falling sounds like bad news, right? We don’t like it when things fall. But “yield” is on the other side of a simple equation to “price”. So when yields have dropped, it means prices have risen (the third part of that equation is “income”, which in gilts’ home world of fixed income is – as the name suggests – fixed)(unless it’s an index-linked gilt, but let’s not go there). So, can we take it that prices rising by 4% in a week is actually good news?
Nope. OK; it is if you hold gilts. But one of the main reasons for holding gilts is that their prices go up when a piece of bad news makes most other markets go down. This is because, in a recession, they’re seen as a safer place to park cash than shares, so if they think there’s trouble ahead, investors sell shares and buy gilts. So when you see that gilt yields have fallen, and therefore that their prices have risen, you can usually assume it means bad news.
So this was bad news after all? Well, maybe. Thursday was Budget day, so we might assume that markets hated the budget, believing it’s more likely to hurt economic growth than help it. I think there’s some truth to that: UK shares, whose prices do drop on bad news, fell on the day. However, it’s not that simple (I’m really sorry about this). Rishi Sunak also announced that, because economic growth had been better than he’d feared (good news!), he wouldn’t need to issue as many new gilts as he’d thought, thereby reducing their supply (economics 101; lower supply equals higher prices).
So, there you have it (clear as mud): Hopefully (but not entirely) a one-off technical thing, which means I can return to the usually-more-interesting, and simple, movements of share prices instead.
Have a great weekend,
Simon Evan-Cook
(On Behalf of Raymond James Barbican)
With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.