Market Update: How concerning is the spike in 30-year US and UK bond yields?

Highlights: US and UK 30-year bond yields have spiked in recent days but 10-year US Treasury yields are more stable. Concerns over US and UK deficits, Fed independence and sticky inflation seem to be the main triggers of the move. But although the government debt in both countries is a valid long-term concern, we think cyclical factors (the Fed cuts and mildly weaker growth) will provide support by anchoring short maturities. Bond auctions show that many investors see value at current levels, with attractive real yields and term premia. We are overweight on US, UK and global IG with 7-10 year maturities due to the steep curves and move out of cash ahead of Fed and BoE rate cuts. Quality bonds also help diversify portfolios against the mild growth slowdown.

• The government deficit issues of the US and UK are well known, and their current account deficits make both countries dependent on foreign funding. So when there are questions about policy credibility, it is no surprise that their bond markets get hit (GBP is weaker too)
• In the case of the US, we think that tariff-related income and resilient growth will cap the deficit. Moreover, the Fed has suggested that ‘the time has come’ to change course, pointing to imminent rate cuts. And the US Treasury is reducing pressure on the long end by redirecting issuance to shorter maturities. We thus think Treasuries should soon find support
• The UK typically has to work harder to attract foreign capital. GBP has weakened as investors wonder how the Chancellor will balance the books. The yield spike may further increase the need for additional spending cuts or tax increases, which may weigh on growth down the line. That should ultimately lead to more rate cuts by the Bank of England and to GBP weakness (especially against EUR) but provide some support to gilts
• Investors who want to incorporate the longer-term government debt concerns in portfolio construction may look at holding hard assets with some protection against growth, inflation and currency debasement risks, such as gold and infrastructure. Our strategy to diversify currency exposure would also work well under this scenario