- Bank holds interest rates again as gilt yields remain elevated
- 10-year gilt yield at levels not seen since the global financial crisis
- How is AJ Bell positioned in its funds and MPS?
James Flintoft, head of investment solutions at AJ Bell, comments:
“The Monetary Policy Committee voted 8–1 today to hold Bank Rate at 3.75%, with chief economist Huw Pill the single dissenting voice in favour of an immediate 25 basis point increase. The vote confirms what the gilt market has been telling the Bank for six weeks: the path of least resistance is towards tighter, not looser, policy.
“The Bank has held, but the credibility cost of March is still being paid for in the gilt market every day. The MPC opened the door to an April hike last month, the market sprinted through it, and the governor has spent the last fortnight trying to close it again. That doesn’t feel like the rhythm of a central bank firmly in command of its own narrative.
Market dynamics
“The decision lands in a market still nursing the bruises of March and now having to deal with another bout of higher oil prices, alongside fresh political uncertainty. The MPC’s hold last month was accompanied by a hawkish narrative that explicitly raised the prospect of an April hike, and the repricing was violent. Two-year gilt yields jumped back above 4% for the first time since October. Meanwhile, the 10-year benchmark is now trading around 5%, a level not seen since the global financial crisis.
“Governor Andrew Bailey’s subsequent attempts to pull markets back – including telling investors mid-month that they were “getting ahead of themselves” – landed late. A central bank that signals tightening one month and counsels patience the next is one that markets and the Treasury will all struggle to plan around. That uncertainty is itself a financial condition, and not a benign one.
How AJ Bell Investments are positioned
“Our positioning across the AJ Bell funds has not changed in substance, and today’s decision does not move the dial.
“In bonds, we have run short duration in conventional government debt for some time, recognising that the risks to inflation, and therefore to nominal yields, remain skewed to the upside. In our lower-risk funds the bond market repricing has created an opportunity. Cash holdings had been carried at deliberately elevated levels, and we have moved roughly a third of that cash into short-dated government bonds across the UK, US and Europe. The repricing of front-end yields has materially improved the asymmetry against cash, with investors now being paid to take a small amount of duration risk, whilst cash yields remain anchored until rate hikes are delivered, if indeed they are. Alongside that, we hold inflation-linked gilts and TIPS, where the contractual link to realised inflation is precisely what nominal bonds cannot offer when the surprise is supply-driven rather than demand-driven.
“Beyond rates, the bond allocations are diversified by design with several different asset classes included: investment-grade corporate bonds, high yield bonds, and emerging market debt. Concentrating duration risk in a single sovereign curve, particularly one as twitchy as gilts have become, is not a portfolio decision we are willing to make.
“In equities, our active positioning reflects the same thesis of making sure portfolios are robust to a changing economic and market environment. The US Energy sector can provide a hedge against the kind of energy-driven inflation pulse the MPC is now grappling with, and the sector remains attractively valued against its earnings power.
“We are also holding an allocation to the US Utilities sector, where the combination of defensive cash flows, regulated inflation pass-through and low valuations gives us a pocket of equity exposure that does not depend on the rates picture clearing up. Both positions are sized to do work in the regime we believe we are in, which has come as a surprise to many in the market.
What to watch from here
“The decision itself is one data point. The more important question is whether the Bank, having now had two opportunities to reset its communication, can find a settled middle voice between the hawkish maximalism of March and the dovish reassurance of April.
“For investors, the lesson of the last six weeks is straightforward. Concentrated positions in the UK gilts and longer dated bonds can be painful in times of inflation upheaval, and do not assume gilts will hedge equities the way they used to.”