Gilt yields rise on inflation and borrowing concerns

Longer term bond yields forged higher this week as a sell-off in longer duration bonds continued. The yields on 30-year government gilts reached their highest level since 1998, nudging past 5.4% at various points on Thursday and Friday compared with around 4.4% a year ago.

This is not a uniquely British phenomenon as global inflationary concerns, partly driven by President-elect Trump’s proposed policies on tax and immigration, are driving worldwide bond markets lower and yields higher. However, with a simultaneous weakening in the pound and an anaemic domestic growth picture alarm bells will be ringing at the Treasury.

Higher borrowing costs significantly erode Chancellor Reeves’ fiscal ‘headroom’, implying some combination of spending cuts and higher taxes will be necessary to rebalance the books. However, this would risk undermining much-needed growth – rather a catch-22.

The FTSE 100 was somewhat resilient to the pressure seen in bond markets, aided by overseas earners. It was up 0.73% over the week by mid-session on Friday, with the more UK-focused FTSE 250 trading 4.11% lower.

US share markets also trended slightly lower over the week ahead of important jobs data. The closely watched US non-farms payrolls data is released later today. This is a key data point for the Federal Reserve when assessing its monetary policy and markets often experience some volatility around the release. A weak report is generally dovish, with a strong jobs report a hawkish signal.

2025 Outlook

What lies in store for markets in 2025? The political and policy upheaval we can expect out of the US, the stimulus program out of China, economic stagnation in Europe, and the budget tightrope walk in the UK. How will these factors impact underlying demand for company sales, margin pressure, inflation pressure, central bank action, long-term bond yields and, ultimately, market outcomes?

Read our 2025 Outlook here.

Garry White and Chief Investment Officer, Patrick Farrell sit down to discuss the investment themes that we expect to effect markets next year. Watch the webcast here.

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Economics

UK government borrowing costs soared, with the 10-year gilt yield hitting its highest level since the global financial crisis and could result in the Labour government missing its own Budget borrowing targets. Interest rates for UK long-term borrowing rose to their highest levels this century. The yield, which reflects how much it costs the government to borrow, is now higher than after Liz Truss' mini-Budget. International investors have been concerned about the government’s heavy borrowing announced in its first Budget at the end of October last year, just as the threat of stagflation – where high inflation occurs at the same time as low economic growth – has increased. The bond sell-off has not only happened in the UK but it has been exaggerated here due to the low growth and high borrowing requirements in the next few years. The pound fell against the dollar.

UK house prices fell in December for the first time since March 2024 but showed gains over the year, according to data released by lender Halifax. House prices slipped 0.2% month on month following five consecutive monthly increases. On an annual basis, prices were up 3.3%, down from 4.7% growth in November and leaving the average price of a home at £297,166.

In the US, Federal Reserve policy makers saw risks of higher inflation, according to the minutes of its December interest rate meeting published on Wednesday. The document showed officials thought inflation was likely to continue fall towards the central bank’s 2% target, but “the process could take longer than previously anticipated” due in part to possible changes to trade and immigration policy by President-elect Donald Trump.

The decision to cut rates at the meeting was more finely balanced than suggested by the voting pattern. The vast majority of the 19 participants thought the quarter-point rate cut was appropriate, but a significant number of officials indicated the decision was a close call. It suggests the Fed will be in no hurry to cut rates further at the upcoming meeting at the end of this month.

US corporate bankruptcies have surged to the highest levels since the aftermath of the global financial crisis, as persistently high interest rates and weakening consumer demand place severe pressure on struggling businesses. At least 686 companies filed for bankruptcy in 2024, an 8% increase from the previous year and the highest number since 2010, according to S&P Global Market Intelligence. Out-of-court restructuring efforts aimed at avoiding insolvency have also risen, outpacing formal bankruptcies two-to-one, Fitch Ratings also reported.

Geopolitics

The US Congress certified Donald Trump’s victory in the 2024 election, in a peaceful proceeding that marked a stark contrast to the violent attempt by his supporters to overturn Joe Biden’s win four years ago. The approval of Trump’s win over vice-president Kamala Harris will pave the way for him to take office as planned on 20 January.

The top banking regulator at the US central bank will step down from his role early, citing the "risk of a dispute" as Washington prepares for the Trump administration. Michael Barr, who had called for stricter oversight after a series of bank failures in 2023, has been a target of Republicans. Mr Barr said he will remain on the board of the Federal Reserve, but in a reduced role.

France’s foreign minister Jean-Noël Barrot said that the European Union would not allow any country to “attack its sovereign borders”, after Donald Trump refused to rule out taking Greenland by force.

The US added several Chinese technology companies to a list of businesses it says work with China's military. The list serves as a warning to American companies and organisations about the risks of doing business with Chinese entities and includes including gaming and social media giant Tencent and battery maker CATL. This does not mean an immediate ban but may increase pressure on the US Treasury Department to sanction the companies. Tencent and CATL have denied involvement with the Chinese military, while Beijing said the decision amounted to "unreasonable suppression of Chinese companies". The list now includes 134 companies.

Companies

Britain’s major retailers will report on Christmas trading in the coming weeks – and the news may not be cause for celebration across the baord. The UK retail sector experienced a lacklustre 2024, according to trade body the British Retail Consortium (BRC). According to the BRC-KPMG retail sales monitor, sales grew 3.2% in December thanks to the Black Friday period running into the month, but the three-month period ending December – the so-called retail ‘Golden Quarter’ – saw a modest increase of just 0.4%. This implies that sales volumes were lower as this is below the current rate of inflation. This year may be difficult for the sector too, as it must absorb a rise in National Insurance Contributions and a higher National Living Wage, as well as new packaging levies.

High-street stalwart Next was the first to report figures and reported good Christmas trading. Management increased its full-year guidance for group profit before tax by £5m to £1,010m. The company is noted for its conservative guidance and raises its outlook frequently. The retailer said it will introduce "unwelcome" price rises to help offset am estimated £73m increase in staff wages and taxes. Next expects prices to increase by 1%, which is below the current rate of inflation. More than half of companies are planning to lift prices over the next three months to help with higher costs, the British Chambers of Commerce business group said.

Christmas trading at Marks & Spencer was brisk with the retailer reporting “another good Christmas” and its “busiest ever peak”. Like-for-like sales were up 8.9% for Food and 1.9% for Clothing, Home & Beauty, but fell slightly short of City expectations as shares weakened in the aftermath. Festive period results from Tesco and Sainsbury’s were similarly upbeat, illustrating that although the high street is under pressure many of the supermarkets are toughing it out, albeit going forward a large store presence exposes them to added employee costs and business rates inflation.

Energy behemoth Shell trimmed its liquefied natural gas (LNG) production outlook for the fourth quarter said oil and gas trading results will be significantly lower than in the previous three months. Management also said it would take $1.5bn to $3bn of non-cash, post-tax impairments, including up to $1.2bn in its renewables division, linked to European and North American assets. Full-year results are released at the end of January.

Jensen Huang, chief executive of US computer chip giant Nvidia unveiled the company’s next-generation gaming chips at CES, an annual technology show in Las Vegas. Known as the RTX 50-series, the new family of chips will use Nvidia's Blackwell artificial intelligence (AI) technology to create movie-quality images, he told a packed arena. The chips will range in price from $549 to $1,999 and are twice as fast as their predecessors, Mr Huang said.

Meta Platforms is abandoning the use of independent fact checkers on Facebook and Instagram, replacing them with X-style "community notes" where commenting on the accuracy of posts is left to users. Chief executive Mark Zuckerberg said third-party moderators were "too politically biased" and it was "time to get back to our roots around free expression". The move comes as Zuckerberg and other tech executives seek to improve relations with US President-elect Donald Trump before he takes office later this month.

Former deputy prime minister Nick Clegg is to step down from his current job as president of global affairs at social media giant Meta Platforms. The former leader of the Liberal Democrats said he was departing the company after nearly seven years. He will be replaced by his current deputy and Republican Joel Kaplan, who previously served as deputy chief of staff in the White House during President George W Bush's administration and is known for handling the company's relations with Republicans.

Samsung Electronics predicted that its operating profit more than doubled in the fourth quarter year on year earlier, but its forecast fell far short of analyst expectations, fuelling concern over its technological competitiveness.