Investors look for bargains as analysts say markets have ‘overreacted’

Gilts could be a lucrative buy as analysts expect an impending recovery after UK government bonds sold off sharply heading into the autumn budget.

Two-, five- and 10-year government bond yields have fallen by almost 40 basis points each in the past month as markets digest the impact of £40 billion in tax rises, increases in government spending and the potential for fewer interest rate cuts from the Bank of England incorporated.

Market prices now indicate that the BofE base rate will be 4 percent at the end of 2025, 75 basis points below the current level of 4.75 percent and 50 basis points higher than end rate expectations of 3.5 percent from just a month ago.

Samuel Adams, an economist at UBS, blamed that “split minds over the interest rate outlook appear to bear much of the responsibility” for the gold market’s swings – as opposed to “concerns about fiscally lax politicians.”

He added: “This is an opportunity to take advantage of, we think. After all, vibes about the economy can change faster than we think.’

New data from the Office for National Statistics will shed light on the bank’s fight against inflation on Wednesday, with forecasters predicting the consumer price index will rise from 1.7 to 2.2 percent in October.

Thomas Watts, senior investment analyst at Abrdn, said: ‘With many economists now expecting the BoE to make further rate cuts in 2024 and even scale back such moves in the coming year after an inflationary budget, the numbers are set to rise even further. added meaning and could perhaps set the tone for the rest of the year.’

Markets now expect the bank to hold its next rate cut until March – or even June – next year, but significant progress on services inflation this week could quickly change forecasts.

Analysts at ING say markets have ‘overreacted to the recent UK budget announcement’ and have become ‘too aggressive on BofE cuts’.

ING expects the ten-year interest rate to fall to 4 percent by mid-2025 – ​​”significantly lower” than the current level of 4.4 percent.

However, the analysts warned that the market would need a “set of better inflation data for the services sector” to convince traders “of the BoFE’s ability to cut more than the paltry two or three total cuts currently priced in.”

BlackRock is currently overweight government bonds, which it believes will benefit as the Bank of England prepares to “cut rates more than the market is pricing in given a soft economy.”

And some groups of retail investors appear to be well positioned if yields – which move opposite to prices – actually fall.

TN25 – a government bond due January 2025 with a coupon of 0.25 percent – ​​was the most held position among the 25-34, 35-44 and 45-54 age groups among Interactive Investor users in the third quarter.

Similarly, exchange-traded funds that track government bonds saw an inflow of $800 million in October, according to Invesco.

Kyle Caldwell, funds and investment education editor at Interactive Investor, said: ‘When interest rates rise, bond yields rise too.

‘As a result, income seekers have more options and can take less risk, as the safest types of bonds, such as government bonds, offer yields of around 4 percent, compared to virtually nothing when interest rates were at rock bottom.

“Falling interest rates could act as a catalyst for a change in the fortunes of alternative income strategies, as well as other mutual funds that have fallen out of favor.”