Yield levels becoming increasingly difficult for long-term investors to ignore

Bryn Jones, head of fixed income at Rathbones Asset Management, believes current yields are an attractive proposition for investors.

He said: “Another sharp sell-off in global rates markets on Friday saw UK 10-year gilt yields move back above the five per cent mark, while French 10-year government bond yields rose above four per cent, their highest level since the Global Financial Crisis.

“These are significant milestones, not just from a headline perspective, but because they represent yield levels that are increasingly difficult for long-term investors to ignore.

“Pension funds, insurers, and other liability-driven investors may begin to view these levels as attractive entry points, particularly given the income now available from high-quality fixed income assets.

“One reason credit spreads continue to remain remarkably tight despite higher government bond yields is the sheer level of all-in yield on offer.

“Investors can now achieve returns that have been absent for much of the last decade without having to move significantly down the credit spectrum. The income available from investment-grade credit remains compelling, helping to support demand even as rates continue to move higher.

“Fundamentally, corporate credit markets are also being supported by relatively healthy balance sheets. Many companies entered this period of higher rates in strong financial shape, having termed out debt at lower borrowing costs and maintained conservative leverage profiles.

“The banking sector is similarly well capitalised, with robust solvency positions and strong profitability continuing to generate substantial excess cash. That capital can be returned to shareholders, deployed into lending, or used to support strategic acquisitions, all of which remain supportive for credit fundamentals.

“There are, however, policy risks on the horizon. The government’s desire to increase tax revenues from profitable sectors, particularly financials, is understandable in the context of fiscal pressures. However, policymakers will need to strike a careful balance.

“Overburdening one of the UK’s most globally competitive industries risks undermining investment, profitability, and longer-term economic growth. The banking sector remains a critical engine of the UK economy, and any measures that materially weaken its competitiveness could have unintended consequences.

“For now, markets appear willing to look through these risks. While government bond yields continue to grind higher, investors remain focused on the attractive income available across fixed income markets and the resilience of corporate fundamentals.

“That combination is helping to keep credit spreads compressed even in an environment where rates volatility remains elevated.”