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Our views 02 January 2024

JP’s Journal: The supply conundrum

5 min read

Bond markets paused for breath in the shortened week. US 10-year yields stayed steady at 3.9% while UK rates nudged higher to end the year just above 3.5% and German 10-year yields closed above 2% after a brief flirtation below. Credit spreads were broadly unchanged – ending 2023 towards their 12-month lows.

From a performance perspective in 2023 sterling non-gilt indices saw a return of 8.6% whilst UK gilts delivered 3.7%. The superior return from credit reflected a near 0.5% tightening in spreads over the year.

I see three dominant themes for fixed income investors this year: growth, inflation and bond supply. The growth outlook looks anaemic and surprises are more likely on the downside. Inflation will be impacted by growth but structural issues in labour markets may continue to weigh on costs. Interest rate settings will be determined by both the growth and inflation outcomes. Bond supply will remain high and will keep pressure on longer maturity yields.

In the UK, gilt supply is expected to be broadly similar to last year. In gross issuance terms the latest estimates show that around £1.5 trillion will be issued in the next five years – or around £120bn a year net when adjusting for redemptions. In crude terms, this means a one-third increase in the current outstanding gilt stock. Supply is likely to be biased towards short and medium maturities  and away from long bonds and index linked gilts. This reflects lower demand in these latter categories, as defined benefit schemes have fewer requirements, but also an element of risk management with the Debt Management Office aware how much interest rate risk can be absorbed without a market hiatus. Nevertheless, the UK gilt market remains uniquely long-dated with a maturity of nearly thirteen years, compared with a global average of around nine years.      

2023 turned out to be a reasonable year for fixed income – a much better outcome than looked likely in October, just 10 weeks ago. My preference remains for investment grade credit over government bonds, but it is a much closer call than it has been for many years.


This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount 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.