Posted By Reuters
Posted on January 10, 2025
By Harry Robertson
LONDON (Reuters) - Europe's largest asset manager Amundi added to its gilt holdings in its global portfolios amid this week's sell-off in UK bonds, and said British finance minister Rachel Reeves will likely have to cut spending as a result of the jump in borrowing costs.
"We took this opportunity to add a bit more duration, particularly on the short end," Gregoire Pesques, chief investment officer for global fixed income at the $2 trillion asset manager, told Reuters on Friday.
Adding duration to a portfolio involves buying bonds beyond the shortest-dated, cash-like securities.
Pesques said the rise in bonds yields this week had made potential returns more attractive, and also said probable spending cuts could reduce inflationary pressures and slow growth, possibly leading to more interest rate cuts.
"In March, we will have the OBR (Office for Budget Responsibility) that will revise its assumptions. In the previous one they had GDP growth of 2% for this year. It seems a bit optimistic to say the least."
Britain's benchmark 10-year bond yield, which rises as prices fall, shot to 4.925% on Thursday, its highest since 2008. The sell-off abated later on Thursday and yields were trading at around 4.8% on Friday.
Amundi is one of a number of asset managers who say they are sticking with gilts despite the turmoil. Bond giant PIMCO said much of the sell-off has been driven by U.S. Treasuries and also thinks Reeves could have to cut spending or raise taxes.
Pesques said he is wary of the longer-end of the gilt curve, however, which is more detached from Bank of England expectations and subject to global conditions.
He said the 30-year gilt yield, which rose to its highest since 1998 at 5.422% on Thursday, could continue to rise. It last traded at around 5.41%.
Pesques said shorter-dated gilts, which are sensitive to BoE rates, should outperform.
"With some cuts in spending, with further normalization of inflation, (after the first quarter) we could have some sort of acceleration in terms of the need to cut."
(Reporting by Harry Robertson; Editing by Amanda Cooper)
