Bond Watch: markets happy, but Autumn Statement hurts households

Sam Benstead breaks down the latest news affecting bond investors.

Welcome to interactive investor’s ‘Bond Watch’ series, covering the latest market and economic news – as well as analysis – that is relevant to bond investors.

Our goal is to make the notoriously complicated world of bond investing simpler, by analysing the week’s most important news and distilling it into a short, useful and accessible article for DIY investors.

Here’s what you need to know this week.

• Learn about: How Bonds & Gilts work | Free regular investing | Buy Bonds

Did you buy gilts in the panic?

Investors who saw through the gilt market panic in September caused by the mini-budget and bought UK government bonds have made an excellent return.

The 10-year gilt now yields 3.15%, down from 4.5% a month ago. That’s a 30% return for investors who bought at the bottom of the market when yields peaked.

Anyone who purchased the iShares Core UK Gilts ETF (LSE:IGLT), which owns gilts of different maturities, is now up 15% from the end of September. The iShares £ Index-Lnkd Gilts ETF (LSE:INXG) is up by 33%.

So, where do bonds go next, and have investors missed the boat if they want to bank a capital gain?

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Chancellor Jeremy Hunt’s Autumn Statement yesterday was welcomed by bond investors, with very little change in yields. Freezes to income tax thresholds, cuts to dividend and capital gains tax allowances, as well as moving the 45% tax rate to more earners will raise money for the government and help control inflation.

Hunt and Rishi Sunak have set out their shop as fiscally conservative, which is just what bond investors want to see. The change in policy from the mini-budget two months ago is remarkable.

Azad Zangana, senior European economist and strategist at Schroders, described the Autumn Statement as “pretty bleak”.

He added: “Despite stating that inflation is the enemy, many of the measures announced do little to reduce inflation. A similar approach to the past has been taken. Borrow more now, promise to borrow less in the future.

“But at least with this fiscal statement, there is a promise to tighten belts at some point.”

The market reaction to the Autumn Statement saw sterling down against both the US dollar and the euro, and gilt yields higher “But nothing as dramatic as the last mini-budget,” points out Zangana.

Mortgage rates fall

Lower gilt yields are finally being passed through to mortgage rates, which should take some pressure off households and the housing market.

Moneyfacts, a market data firm, calculates that 60% loan-to-value mortgages are available at 5% for fixes from two to 10 years. This was about 6% a month ago, meaning that a £250,000 loan payment has dropped from £1,611 to £1,461 in a month.

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Households will still be under immense pressure, but it is a step in the right direction and shows why the bond market matters and governments should be fiscally responsible.

Better mortgage deals won’t do much to boost the economy, however. The Bank of England is incredibly bearish on the economy. It says the UK is facing its longest recession since records began, with the economic downturn that has already begun likely dragging on well into 2024.

How to spot a market bubble

Not strictly bond news, but relevant to all investors, was the collapse over the past week of FTX, which at one point was the world's third-largest cryptocurrency exchange.

In a dramatic tale that is still unwinding, it seems that Forbes cover star, political donor and philanthropist Sam Bankman-Fried, was using customer money to cover losses at a hedge fund, Alameda Research, which he also owned. The Financial Times calculates that there is a $9 billion (£7.5 billion) black hole in FTX’s balance sheet.

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David Coombs, a multi-asset investor at Rathbones who is approaching his 40-year anniversary as an investor, has five tips for investors looking to profit from the next big thing. He says:

1. When celebrities back any investment – avoid
2. When a company advertises during half time of the Super Bowl – avoid
3. Shiny new investments that promise to democratise capitalism – avoid
4. Stick to what you understand
5. Never forget points one to four

Wise words. He adds that there could even be wider contagion from the collapse of cryptoassets, something he sees as likely as their intrinsic value is zero.

“At the moment this seems unlikely, however, we need to be vigilant. It’s hard to know for certain just how much money has been sunk into crypto because it’s so opaque. The UK government estimated that globally there was about $930 billion (£781 billion) in June, down from a peak of $3 trillion in November 2021. Prices have slumped a great deal in the past six months too.”