16 May 2025
30-year Gilt yields surged to their highest level since 1998 last week due to a sell-off in US Treasuries, as investors voiced concerns about their 'safe haven’ status. Despite market speculation about potential Bank of England intervention, fixed income portfolio manager Shamil Gohil outlines why he believes current conditions do not necessitate such measures.
Key points
30-year Gilt yields reached their highest level since 1998 on April 9, increasing by 0.28 percentage points to over 5.63%, before closing at 5.58%. This sharp rise came amid a sell-off in US treasuries, as investors fretted over their traditional role as a 'safe haven' in times of elevated volatility.
The spike in yields exceeded January's previous multi-decade high and was the biggest intra-day move since Liz Truss's 2022 mini-budget, leading to speculation from the market about possible intervention from the Bank of England. However, we believe this is not a repeat of the 2022 sell-off; markets are generally functioning smoothly and there is no need for significant intervention at this stage.
Factors driving the yield increase
The rise in 30-year Gilt yields was predominantly driven by the US, as international investors shun US risk. The UK was caught up in this for several reasons. Firstly, the government's precarious fiscal position and limited headroom means UK government bonds trade with a higher beta. As the Gilt market is relatively illiquid, these moves get exacerbated. The fiscal headroom is already eroding with lower growth forecasts, due to the global trade war, and potentially higher-for-longer rates and inflation environment persisting. Speculation that the government might change the goal posts on their fiscal rules is also not helpful, as it creates uncertainty, undermines their credibility, and raises debt sustainability concerns to the fore.
We also saw some leveraged stops triggered, driven by fast money investors. Furthermore, international sellers unwound some long positions to raise liquidity and there is now less conviction on the curve flattening trade, so some of the selling was positioning-driven as UK exposure is fairly consensus long.
However, it is worth noting that the underperformance simply unwound the previous day’s outperformance. The 30y Gilt auction on April 8 was actually very strong, with c. £13.3bn bids received for £4.5bn Gilts, which ultimately shows demand is still there from real money investors at these higher yields.
Finally, the market will need to clear some additional Gilt issuance in the near term, but the DMO (Debt Management Office), which issues Gilts on behalf of the UK Treasury, can adjust supply to control the long end of the curve if necessary. We have already seen the BoE amend the planned schedule to auction short maturity bonds on April 15 (instead of long maturity) off the back of this recent volatility.
Is the market functioning as it should?
Funding markets and financial conditions are not showing signs of stress and the market is generally functioning smoothly for now. Talking to our trading team, we can monitor the depth of the market by looking at volumes versus. transaction costs (i.e. bid/ask spreads) in periods of stress and compare to normal times. At the moment, we can see high volume and costs and therefore lower liquidity is persisting. However, whilst transaction costs are indeed historically elevated (based on our own transaction data), they are nowhere near the levels seen during the 2022 LDI crisis. We believe there is no need for an emergency rate cut ahead of the next MPC meeting in May.
Whilst the BoE could also respond by reducing quantitative tightening or even by temporary easing, we believe the threshold to do that is still higher. LDI funds have more cash and collateral than in the previous crisis so there is no need to panic. It is more likely the Fed may have to act first. It is worth re-iterating that this was not a 2022 style sell-off. The current situation is much more orderly and relative moves are benign, despite hitting new highs in yields.
We have no exposure to the long end of the curve, across our Sterling and Global Investment Grade Funds. 30-year Gilts tend to be highly correlated to risky assets and we tend to be neutral this part of the curve, in part due to the elevated volatility levels as well as macroeconomic uncertainty.
We believe an active approach is critical in this uncertain market environment. All-in yields in high quality bond markets remain attractive offering an attractive income proposition alongside a cushion against underlying rates and credit volatility. Fidelity is well-positioned with an experienced team to navigate the current market volatility and fully exploit the period ahead.
Important Information
This information is for investment professionals only and should not be relied upon by private investors. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. The value of bonds is influenced by movements in interest rates and bond yields. If interest rates and so bond yields rise, bond prices tend to fall, and vice versa. The price of bonds with a longer lifetime until maturity is generally more sensitive to interest rate movements than those with a shorter lifetime to maturity. The risk of default is based on the issuers ability to make interest payments and to repay the loan at maturity. Default risk may therefore vary between government issuers as well as between different corporate issuers. Due to the greater possibility of default, an investment in a corporate bond is generally less secure than an investment in government bonds. Fidelity’s range of fixed income funds can use financial derivative instruments for investment purposes, which may expose them to a higher degree of risk and can cause investments to experience larger than average price fluctuations. Reference in this document to specific securities should not be interpreted as a recommendation to buy or sell these securities and is only included for illustration purposes.