What’s Next for Gilts and the United Kingdom?

Gilt prices have been struggling this past year due to surging inflation and interest-rate increases. David Zahn, Franklin Templeton Fixed Income’s Head of European Fixed Income, shares his outlook for the UK economy and why he thinks now is a good time to consider investing in gilts.

Key takeaways:

  • UK inflation remains high. However, the Bank of England’s (BOE’s) interest-rate increases have started to take effect as the economy is starting to slow down.
  • The path of the UK economy is uncertain, and most asset classes will likely experience volatility.
  • We believe now is a good time to consider UK gilts for their high yields and relatively low risk.
  • Both international and domestic UK investors should find UK gilts more attractive as the UK economy stabilizes.

It’s been a year since the “mini-budget” of the short-lived Trussonomics era. So, now seems like a good time to check in on the United Kingdom and UK gilts. Back then, there was a lot of concern that gilt yields were high. But what’s interesting is that today, yields are actually higher than they were a year ago, and the BOE is still talking about raising interest rates.

Currently, the UK economy isn’t looking all that great. Growth is low, inflation is high and the BOE was behind on tightening. The UK economy continues to lag its peers in the West and in the euro area. The country had a deeper drop due to COVID-19 in 2020, and the rebound since has been subpar.

UK Economy Continues to Lag