MyStratWeekly – January 14th 2025

Topic of the week: A word on UK Gilt market turmoil

• UK gilt yields have increased substantially so far this year amid a global bond rout. UK 10-Yr yields top the 4.80% mark and 30-year yields now hover about 28-year highs near 5.40%.
• Chancellor of the Exchequer Rachel Reeves will have to convince market participants that fiscal deficits can be reined in. The headroom for public investment spending has been reduced by poor growth in the last few months of 2024. Reeves may seek up to £12 billion in savings to fund investment.
• The Gilt market tensions have drawn comparisons to the 2022 crisis that ended Liz Truss premiership. However, the commitment to fiscal responsibility of the Starmer government is more credible. Kwarteng and Truss had failed to convince markets that sound public finances could be restored.
• Political interference from the incoming US administration may have impacted UK government bonds.
• There is currently no panic selling in gilt markets comparable to LDI-driven fire sales in 2022. The BoE has the means to intervene in markets if need be.

Market review: Tighten your seat belts

• Strong US payrolls report send Treasury yields north of 4.75%;
• Inflation expectations on the rise in ISM, UofMich surveys;
• Sterling weakens to $1.22;
• Sovereign and credit spreads weathered equity jitters and higher bond yields.

(Listen to) Axel Botte’s

• Review of the week – Financial markets and US labor market;
• Theme – British bond market.

Chart of the week

Egg prices have been soaring in the United States. The price of a dozen of eggs reached $5.72 last week, surpassing the previous peak level of $5.12 in December 2022. In California, a carton of eggs hit $8.97 earlier this month.

The run-up in egg prices is due to the outbreak of bird flu in the US impacting more than 130 million poultry across the US, the general cost of doing business and some changes in local laws.