Weekly Market Update - bonds in the spotlight

The latest economic news and market highlights from the UK and abroad.

The key takeaways

💰 UK bond slump – gilt yields and borrowing costs rose significantly – as weak growth figures showed an increased risk of economic stagflation (high inflations, stagnant economic growth and elevate unemployment).

🪜 Euro area inflation keeps climbing – the annual inflation rate rose for the third straight month, reaching 2.4% in December – due to rising services costs.

💼 US job openings rise – Job Openings and Labour Turnover Survey (JOLTs) show job openings rose by 259,000 in November. This exceeded expectations and was due to large increases from the professional and business services sector and finance and insurance sector.

🍁 Canadian Prime Minister resigns – after nearly a decade in office, Justin Trudeau will step-down from the top-job within the next few months. This leaves Canada without stable leadership just as Trump steps into the presidency and calls for the country to be made the 51st US state.

🚫 Tencent blacklisted in the US – the US blacklisted the Chinese tech company for alleged ties to China’s military. While this doesn’t come with any specific sanctions, reputational damage caused the share price to plummet.

This week, concerns for the outlook of the UK economy has taken centre stage. With tax rises, rising debt levels, and stubbornly high inflation there’s speculation that the Bank of England may need to slow their plan for interest rate cuts. However, this may hinder already weak levels of economic growth and push unemployment levels higher.

These challenges have caused gilt yields to spike to the highest rates since 2008, meaning existing investors suffer, while also triggering a fall in value for the pound and outflows from UK assets. However, rising bond yields are not unique to the UK – see our Chart of the Week. It’s too early to say if this is a short-term blip before conditions improve or the beginning of something more severe. Such rises could also offer opportunities for fresh bond investment at favourable rates. As always, diversification – both between and within asset classes – remains essential in navigating these evolving conditions.

Chart of the week - 10-year Treasury yield change after the first Fed cut

Source: Bloomberg, JPMAM, December 2024

The above chart shows the path of change for US Treasury yields following an interest rate cut from the Fed. What’s surprising this time around (Sept ’24) is yields trending significantly higher following the latest rate cutting cycle.

Conventional wisdom, and historical precedent, suggests cutting interest rates would cause bond yields to fall, as they become more valuable when returns elsewhere diminish.

However, unusually, this hasn’t occurred in the latest cycle. Despite the Fed’s continued rate cuts, yields keep rising – why? This stems from the market’s belief that, as government debt keeps rising and becomes more and more unsustainable, they’ll eventually struggle to keep servicing it over the longer-term. This uncertainty, even if small, increases risk for bond holders and in turn lowers their value (increasing yield).

This is a risk that’s becoming more and more prevalent, especially in the US where debt levels are some of the highest in the developed world, and its debt-to-GDP tops 120%. While this is no cause for immediate alarm, debt level could be reigned-in by prudent policy measures – something that may not be a high priority for the incoming president. The situation will be monitored carefully going forward. This highlights the need for caution, and the advantage to diversifying assets outside of the US – helping to navigate uncertainties and to help build resilience.

Mixed UK markets – the FTSE 100 finished the week in positive territory, boosted by mining companies and its reduced reliance on domestic revenue, unlike the FTSE 250. In contrast, the FTSE 250 was dragged down by rising bond yields and disappointing Christmas trading updates from retailers like B&M and Greggs.

US subdued – US markets have had a flat start to the year due to increased economic uncertainty, although some gains were made in GBP terms. Tech stocks, including Nvidia, showed strength, alongside consumer services, while staples and utilities were weaker.

Asian markets gain – in Asia, the Hang Seng - led by Tech - fell on concerns around Chinese growth and Fed policy uncertainty. The Nikkei fell in Yen terms for similar reasons, combined with a domestic contraction in manufacturing activity.

Oil jumps – oil prices hit a three-month high as the market tightens amid a contraction in US supply and a cold snap increasing demand in Europe.

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