AXA Cuts UK Government Bond Holdings After Income Tax U-Turn, But Others Still Back Gilts
AXA Investment Managers reduces exposure amid fiscal uncertainty while rival fund firms maintain bullish views on UK government bonds.
Asset manager AXA Investment Managers has reduced its exposure to UK government bonds — also known as gilts — after Britain’s government abandoned plans for a broadly-announced income tax rise.
The decision followed markets’ surprise at the policy reversal and concerns about the UK’s fiscal credibility under Finance Minister Rachel Reeves.
AXA’s global sterling and fixed-income portfolio, previously overweight in UK debt, has shifted to a neutral stance.
Nicolas Trindade, who manages the global strategy at AXA that includes UK bonds, said the headroom left for the government to meet its fiscal rules is now expected to be closer to £15 billion rather than the previously cited £20 billion.
The policy U-turn triggered an immediate sell-off in gilts, with yields on ten-year paper rising before retracing some losses.
Bond yields move inversely to prices, so the sell-off indicated diminished investor confidence.
One market observer remarked that the government’s credibility and ability to deliver on its fiscal commitments had once again been brought into question.
Despite AXA’s cautious stance, several major fund managers remain confident in UK bonds.
Royal London Asset Management purchased five- and thirty-year gilts, whilst Allianz Global Investors and Fidelity International continue to favour gilts over some alternatives such as US Treasuries.
Their rationale is that the Bank of England is still likely to cut interest rates as inflationary pressures wane, which would support bond prices.
These differing positions reflect the bifurcation in the market: on one hand, concerns around the UK’s fiscal trajectory and tax policy; on the other, belief in the relative value of gilts given the interest-rate outlook.
The outcome will hinge on the forthcoming Autumn Budget and how decisively the government addresses the structural gap in its public finances, as urged by investors managing trillions of dollars globally.
The decision followed markets’ surprise at the policy reversal and concerns about the UK’s fiscal credibility under Finance Minister Rachel Reeves.
AXA’s global sterling and fixed-income portfolio, previously overweight in UK debt, has shifted to a neutral stance.
Nicolas Trindade, who manages the global strategy at AXA that includes UK bonds, said the headroom left for the government to meet its fiscal rules is now expected to be closer to £15 billion rather than the previously cited £20 billion.
The policy U-turn triggered an immediate sell-off in gilts, with yields on ten-year paper rising before retracing some losses.
Bond yields move inversely to prices, so the sell-off indicated diminished investor confidence.
One market observer remarked that the government’s credibility and ability to deliver on its fiscal commitments had once again been brought into question.
Despite AXA’s cautious stance, several major fund managers remain confident in UK bonds.
Royal London Asset Management purchased five- and thirty-year gilts, whilst Allianz Global Investors and Fidelity International continue to favour gilts over some alternatives such as US Treasuries.
Their rationale is that the Bank of England is still likely to cut interest rates as inflationary pressures wane, which would support bond prices.
These differing positions reflect the bifurcation in the market: on one hand, concerns around the UK’s fiscal trajectory and tax policy; on the other, belief in the relative value of gilts given the interest-rate outlook.
The outcome will hinge on the forthcoming Autumn Budget and how decisively the government addresses the structural gap in its public finances, as urged by investors managing trillions of dollars globally.
