Commenting on the Iran war impacting UK Gilts, Craig Veysey, Head of Fixed Income at Guinness Global Investors says that if yields move further out of proportion to the underlying UK economic data and/or energy prices begin to stabilise, his bias would be to be a buyer of gilts.
Gilts have been hit particularly hard because they had already rallied to their lowest yield levels in more than a year on expectations of further Bank of England cuts.
The market had become quite complacent about inflation, and that has now been abruptly reversed. Since the month-end, the move has been very sharp.
UK 2-year yields have risen from 3.52% to 4.17%, 5-year yields from 3.68% to 4.35%, and 10-year yields from 4.23% to 4.80%. Those are very large moves in a matter of days, and much bigger than we have seen in most other major developed bond markets.
The UK is especially sensitive to higher energy prices, so a Middle East-driven energy shock feeds much more quickly into inflation concerns here than in the US, for example.
UK CPI is still running at 3% year-on-year, already above target, so when gas prices surge, the market immediately starts to question how much room the Bank of England really has to cut.
Around 50 basis points of cuts that were priced at the end of February have effectively been stripped out.
I do not think this is a fiscal crisis or a repeat of the Truss episode. This is an inflation repricing story. Safe havens do not work in the usual way when bonds have already rallied hard, yields are near their lows, and markets suddenly have to worry about inflation again.
At these levels, I do think gilt yields are becoming attractive again. There is clearly a risk that energy prices stay higher for longer if the conflict drags on, and central banks are far too early in the process to react.
But if yields move further out of proportion to the underlying UK economic data and/or energy prices begin to stabilise, my bias would be to be a buyer of gilts.
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