By Abhi Chatterjee, Chief Investment Strategist at Dynamic Planner

Since September 2024, there has been a marked increase in yields in the Fixed Income markets. Within the UK and its popular press, the move in UK Gilts has featured prominently with lengthy discussions on the whys and therefore, but when placed in the global perspective, the move is not singular. At Dynamic Planner, instead of concentrating on a single maturity point or issue, we consider a fixed income index and its redemption yield – the combined yield to maturity of the basket of issuances which is representative of the asset class – as the appropriate representative of investing in the particular fixed income asset class. Figure 1 and Figure 2 shows the changes in yields on the representative baskets of UK Gilts and Global Government Bonds, as well as the Sterling Investment Grade Corporate and Global Corporate Bonds.

An interesting case in point has been that both the UK and Government Bond yields have risen, with the Global Bonds rising slightly lower than their UK counterparts. Even if we did concentrate on the 10Y Benchmark rates in the UK and the US, Figure 3 shows that the yields on these have increased almost in lock step. This raises the question as to why the focus is on the UK Gilts in particular.

Let us consider the macro-economic back drop. Both the US and UK economies have been through a change of government. The Labour government in the UK has enacted a change in the business of government – a bold plan to invest in growth, combined with raising the taxes primarily on corporates outlined in the Autumn Budget. This is expected to inflationary by some quarters, with negative chatter around a “stagflationary” outlook impairing bond yield.  The US has also seen its fair share of change, with an overwhelming majority for Republicans. The resultant Trumpian policies are also considered inflationary, with the possibility of tariffs being placed on countries deemed to be involved unfair business practices or running a high trade deficit. The only difference with the UK is the US exceptionalism, fuelled by sterling growth, tight labour markets and expected tax and government spending cuts proposed by the incoming US administration. In both cases, given that growth plans in the UK and the tax cuts in the US have to be funded, this raises questions about debt sustainability in all economies. Bond yields ebb and flow – as long as there is none of the disorderly rout one remembers from Liz Truss’s disastrous “mini” budget, one can expect as plans become reality, the market will incorporate all the information within to settle at the “new neutral”. In passing, it must be mentioned that UK Gilts now is quite near what they were when the last Labour Government under Tony Blair took power and what followed was a decade of UK exceptionalism with high growth and productivity, based on their “Tax and Spend” policies.

Let us now look to our current allocations and the impacts there of. Since 2017, we have been on the path of globalising our portfolio – increasing decreasing the “home bias” in the assets invested into a more globally oriented allocation. As mentioned during the previous “News from the IC”, while we do not endorse the between 5-7% allocation in either Fixed Income and Equities to the UK, which seems to be the norm. We felt that while there is optimism around UK Plc, given the supportive comments from the Labour Government, it was felt that the companies that would receive a boost from these would be the Mid and Small Cap companies which derive the primary revenues from UK. The proportion of these companies in the broad UK benchmark is small – thus allocating a higher proportion to UK equities was felt to be inefficient. In addition, with UK economy in a quagmire, the Investment Committee also felt that Global fixed income provided better risk-reward characteristics to UK fixed income.

Figure 5 shows the broad changes made during our last review of allocations in Q3 2024. The impact of the changes in Fixed Income Allocations can be seen in Figure 6.

As can be seen our shift in allocations has neutralised the impact of the drop in UK Gilts – the lowest negative is in Risk Profile 6 which stands at 0.16bps. The primary benefit to the allocations has been the drop in the Sterling, which fell from $1.31 in September 2024 to $1.22 in January 2025, a drop of around 6.8%. In a scenario such as this, foreign assets priced in Sterling, as our Global fixed income asset classes, become more expensive giving us a boost in returns, as can be seen in the change in prices of the foreign assets.

In conclusion, our allocation changes, made in line with the expectations about the macro environment, have proved resilient to the vagaries of the fixed income market. We will continue to monitor our allocations and updated our clients periodically.

Basis of Preparation and Use

You should not rely on this information in making an investment decision and it does not constitute a recommendation or advice in the selection of a specific investment or class of investments.

The information does not indicate a promise, forecast, or illustration of future volatility or returns.  The outputs represent a range of possible indications of volatility and returns for various collections of asset classes. Dynamic Planner Ltd is not liable for the data in respect of direct or consequential loss attaching to the use of or reliance upon this information.

Dynamic Planner does not warrant or claim that the information in this document or any associated form is compliant with obligations governing the provision of advice or the promotion of products as defined by the Financial Services Act.