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Our views 27 September 2021

JP’s Journal: Adapt and prosper

5 min read

Last week saw global government bond yields moving higher across the board. It also felt quite pivotal in exposing the challenges societies face in the new Covid world.

It seems likely that we will have to live with the virus and that Delta will become a new infection we just have to live with. Vaccinations will help but not be a cure.

We are seeing the consequences in the labour market and how people view office working. I do not see a return to pre-pandemic patterns. Office ‘based’ workers will set out what suits them – and employers will adapt. This does not necessarily mean less office space demand – but it will be different. There will be more emphasis on communal space to maximise the impact of people collaborating. I have been working in our office in Gracechurch Street, in the City of London, two to three days a week since the easing of restrictions. And there are good and bad points: on the positive side I am meeting new people, having unplanned conversations, and relishing a change from the sterile working from home (WFH) environment. This last point is really important. WFH is not a social experience and I have found getting back to the office is a really liberating experience. I now cycle to work; the 15-mile round trip has some health benefits although traffic congestion and consequent risk is increasing. Would I have made this switch without Covid? No – but it has allowed me to question old patterns that have become ingrained. Why take a tube to work and then spend time on an exercise bike in the gym? The downside of the return is less time for reflective thinking, more interruptions and ‘Covid aware’ office configurations that, obviously, isolate and reduce interactions. The businesses that succeed will be those flexible enough to harness the advantages, address the negatives and free themselves from past thinking.

To be able to think strategically at times of change is a key feature of leadership – and, in relation to energy policy, the government’s record is mixed. The UK has made great strides to reduce reliance on coal. But contingency planning has to be central in any transition. Given our reliance on gas for electricity generation, the lack of storage capacity shows poor foresight that has not been replicated by other European governments. Similarly, in many areas the UK government has been slow to realise the implications of changes brought about by their own policies (IR35), Brexit and Covid-related restrictions. To be fair: fire-fighting the pandemic has been the top priority. However, tactical tinkering is a poor substitute for strategic planning.

Cash and government bonds

Last week the MPC voted unanimously to keep rates where they are, but only voted 7-2 to continue with their existing programme of asset purchases. The messaging is that the UK is edging closer to tightening policy. This is despite a more pessimistic view on near-term growth – with a downward revision to Q3 growth expectations, reflecting supply constraints on output. Inflation, however, is causing the MPC more concern as shown by the forecast that CPI inflation will move above 4% in Q4.

Data releases last week were generally to the downside. The US composite PMI fell from 55.4 to 54.5, a 12-month low. The survey indicated supply chain disruptions and materials shortages pushing costs up. Both the euro area and UK PMIs disappointed. The euro area composite PMI fell to 56.1 from 59.0, weaker than expected and a five-month low driven by manufacturing and services. The UK composite PMI fell to 54.1 after 54.8, again weaker than expected and at a seven-month low. However, while disappointing relative to expectations, we should remember that all these PMIs are still consistent with economic expansion.

US Treasury 10-year yields closed at 1.45%, the highest in three months. In the UK yields pushed above 0.9% whilst French 10-year bond yields went positive. Real yields moved lower in all markets and implied breakeven inflation was broadly unchanged – the exception being the UK where inflation expectations moved higher.


Investment grade credit spreads did not react to higher government bond yields. In the sterling market the yield premium was maintained around the YTD low. A new hybrid issue from BAT was the main focus in the euro market – with a spread of 4.35% above German government yields. The deal attracted wide interest and the issuer was able to sell €1bn of bonds.

High yield markets were more impacted by the sell-off in government markets – with a more defensive tone being adopted.

The German election result appears inconclusive and so is unlikely to herald a shift in policy that many had anticipated in a post-Merkel world. The Greens have done well and, short of a SDP / CDU coalition, will wield more influence. Despite the rhetoric, Germany lags behind many European countries on carbon reduction so it will be interesting to see how the country manages the transition without a nuclear generation base. Reliance on Russian gas supplies now appears less attractive.


Past performance is not a reliable indicator of future results. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.