Bond market transition, UK in dangerous territory (with Lizzie Burden)

How worried are you about higher long-end yields getting out of control?

Lizzie Burden

Seema Shah

The bond market is very concerned about the conflict and inflation. If the conflict extends and oil prices continue to rise, it becomes something equity markets cannot ignore. It's a key transition. Nvidia earnings this week are important to continue the positive equity narrative. If this continues for another month, we get into dangerous territory.

The 4.5% nominal yield level is often pointed to as a threshold, but given strong US economics, that level is probably a bit higher. However, pressure on all parts of the curve means we're likely not too far off.

At what point do higher real yields challenge US equity leadership?

Lizzie Burden

Seema Shah

It's difficult to draw a line, but typically 4.5% on the nominal side is pointed out. Given strong US economics, that level is probably a bit higher, but we're likely not too far off.

Investors talk about 6% yields on gilts if political instability worsens. Do you see that as realistic?

Lizzie Burden

Seema Shah

The UK is in considerably more dangerous territory than other economies. It has the global inflation/bond yield pressures plus domestic political instability. The UK has pushed itself into a level where from a fiscal side there is very little way out. The bond market wants to know who the government will be for the next year or two and that there is commitment to fiscal rules. The UK has a deteriorating long-term growth rate.

The last thing the UK needs is this domestic political instability piled on top of international instability.

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