Global investors eye UK gilts selloff with caution

By Harry Robertson and Naomi Rovnick

LONDON (Reuters) - The UK government bond market has sent investors an unwelcome reminder of the kind of volatility that can materialise when enough concern builds over government finances, as yields soared to their highest since 2008 and the pound has dropped.

Benchmark 10-year gilt yields hit their highest since August 2008 on Thursday, while sterling fell by as much as 1.6% at one point, before selling abated, allowing prices to stabilise a little.

This week's global selloff in government bonds, driven by expectations for inflation to pick up, for interest rates to fall more slowly and for government finances to feel more strain has sent ripples through currencies and stocks, with the UK hit especially hard.

Here's what bond fund managers and strategists are saying:

RANJIV MANN, SENIOR PORTFOLIO MANAGER, ALLIANZ GLOBAL INVESTORS:

"We still favour owning gilts both on an outright and relative value basis versus (German) Bunds and Canadian rates."

"Rising U.S. rates have been the primary driver of the broader sell-off in global rates recently, given a combination of a more hawkish Fed and expectations of a pro-growth fiscal policy stance from the incoming Trump administration. Gilts have followed the broader sell off in global rates."

"At the current level of gilt yields, the fiscal space available to the government is now being eroded, which could put pressure on the government to signal a tighter fiscal stance ahead. A shift in the government’s fiscal stance would begin to present further downside growth risks for the UK economy this year."

MATTHEW AMIS, INVESTMENT DIRECTOR, ABRDN:

"We've not really changed our position in the last 24 hours. At the end of last year, we were long gilts versus U.S. Treasuries. That worked well up until 24 hours ago. We're lightly positioned there, and we're kind of inclined to hold it here."

"We'll wait to see how the market trades in the next 24 hours. We've seen (former UK Prime Minister) Liz Truss, we've seen various episodes like this in the gilt market before. So if it continues to move, then we won't be standing in the way of it."

RUSS MOULD, INVESTMENT DIRECTOR, AJ BELL:

"The UK is still feeling its way after the budget. The biggest issue of all is that we need to have an honest discourse about the widespread dissatisfaction with our public services."

"If we want to have a Scandinavian system, we'll need pay the tax rates needed to fund it. The alternative is that our public services will come to more resemble those in the U.S."

"The public need to be presented with that choice and it's a decision that needs to be taken as a nation but politically, it's not a decision anyone wants to be seen as forcing."

JAMES ATHEY, FIXED INCOME MANAGER, MARLBOROUGH:

"Government indebtedness is an increasing concern for investors worldwide."

"The UK is not at the extreme end, its budget balance is not worse than the U.S. or France, although sentiment does seem to be particularly negative."

"We’re still long UK and uncomfortably so. There are concerns around fiscal policy and the supply issue, but that was already in the price."

"Big assets managers were long gilts at the end of last year….some of those positions may be getting squeezed out."

IAIN BARNES, CHIEF INVESTMENT OFFICER, NETWEALTH:

"Anyone who has been positioning portfolios really to build into the outlook for UK growth will be worried that the Chancellor is going to find other ways to increase the tax take again."

"Anything with clear UK-factor exposure as well… anything that's trading off the confidence in the UK market combined with interest-rate exposures, has really struggled, so we're avoiding those areas completely."

"You saw smaller companies in the UK get hit particularly hard, we're focusing more of our exposure up at the long end."

PEDER BECK-FRIIS, ECONOMIST, PIMCO:

"If the current trends of rising yields and slowing growth persist, the chances of spending cuts or tax increases will increase for the government to adhere to its new fiscal rules."

"Although UK-specific factors, such as the budget, have contributed to the rise, most of the increase has been driven by rises in U.S. Treasury yields during the same period."

LINDSAY JAMES, INVESTMENT STRATEGIST, QUILTER INVESTORS:

"Whilst this will undoubtedly cut into Rachel Reeves' already limited budgetary headroom, the likelihood of further tax rises in the coming months seems slim."

"Spending cuts feel like the more likely outcome, with the Treasury declaring yesterday that meeting the fiscal rules remains 'non-negotiable.' With public services already struggling and the investment budget seen as the source of future growth, the decision of where cuts could fall will be crucial. However, wherever the cuts may fall, her goal of raising economic growth has just become that bit harder."

(Compiled by Amanda Cooper; Editing by Dhara Ranasinghe)