Bonds remain in focus - the week ahead

Important information -  the value of investments and the income from them can go down as well as up, so you may get back less than you invest.

Investors remain fixated on the bond market this week as they weigh up: US tax cuts; a soaring debt burden in America; persistent inflation; higher fiscal spending in Europe; and rising pressures on Britain’s self-imposed tax rules. 

Rising yields 

The days of rock-bottom interest rates and bond yields to match look well and truly over. Governments on both sides of the Atlantic are having to pay investors over 5% a year to persuade them to lend for 30-years. The yield on long gilts closed at 5.48% last week and the cost of borrowing for 10-years has also risen faster in Britain than any other G7 country bar Japan.

This is partly a domestic issue. The Chancellor was only ever going to be able to meet her rules on funding day to day government spending out of tax revenues if everything went to plan. And it hasn’t. The cost of its debt has risen, growth is sluggish, productivity weak, and there are mounting pressures to ease back on the spending cuts that were needed to make the numbers add up. 

With the Prime Minister walking back on unpopular cuts to winter fuel payments and a two-child cap on benefits, Rachel Reeves looks likely to be back for more from tax-payers in the autumn budget.

But this is a global issue too. US bond yields are rising because the world no longer views America as a safe bet. Concerns about Donald Trump’s trade war and the big tax cuts he is pushing through Congress nudged the US’s 30-year bond yield above 5% too last week. America’s fiscal splurge could see another $3trn added to the US government’s debt mountain and take the debt to GDP ratio from 100% to 125% over the next decade. Moody’s, a rating agency, has cut Uncle Sam’s triple-A credit rating in response. 

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Simmering trade tensions 

The US’s debts are the market’s latest concern, but trade war fears are bubbling away in the background too. Last week, attention shifted to Europe as the US President took to social media to threaten an immediate tariff hike to 50% in response to ongoing trade negotiations that he said were going nowhere. 

Within 48 hours, EU Commission president Ursula von der Leyen had talked Trump down and the original deadline of 9 July for trade talks was reinstated. But Friday’s outburst was a reminder that US policy remains volatile and unpredictable. It also made clear that higher spending to replace America’s waning appetite for providing a defence backstop is not Europe’s only problem with Washington. 

Where next for shares? 

Add together the increased competition for investors’ attention from bonds and the growth threat from the simmering trade war and the outlook for stock markets looks at odds with their recent return to February’s all-time high. Last week duly delivered a more subdued backdrop for equity markets. 

After two years of rising valuations and robust earnings growth, 2025 was always going to be harder work for stock markets. And now equities look to be locked in a wide trading range. Shares are underpinned at the bottom of that range by the seeming willingness of the US administration to rein in tariffs if the market falls too far but also to be capped at the February high where valuations look stretched. 

With earnings growth moderating to mid-to-high single digits from low double digits, a multiple of over 20 times expected earnings looks demanding against a backdrop of 5% plus bond yields. Hence the trading range. 

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Investing in a tired bull market

So, the short-term bull market from the October 2022 low looks to have run its course. The bigger question now is whether the 16-year bull market since the financial crisis has also run out of steam. Only time will tell. But the parallels with the end of the 20-year bull market in the 1950s and 1960s look interesting. 

Without the benefit of a crystal ball, investors must protect themselves by putting their eggs in a wide range of baskets. If the world is losing faith in the American safe haven, and bonds and shares are moving more in lock step than before, geographical diversification and a wide spread of assets make sense.

If you’ve got a burning question you want to ask, why not drop us a line. Ask us your question.

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