Monday Espresso Podcast - 13th January 2025

[00:00:00] Nathan Sweeney: It is Monday, the 13th of January. I'm Nathan Sweeney, CIO of multi asset Marlborough. And today I'm really excited to say that I'm joined by James Athey. James is our bond fund manager here at Marlborough. And one of the great things about working in the Marlborough multi asset team is we've got exposure to some of the greatest minds in the industry through our single strategy business.
And we often call upon James for his insight on what's happening in bond markets. And given there was a lot happening in bond markets last week, I thought it'd be a great opportunity to get James on the show. So good morning, James.

[00:00:34] James Athey: Hi, Nathan. Morning. Good to be here. Thank you.

[00:00:37] Nathan Sweeney: So I think we'll just start off with a quick recap of what was happening in markets last week.
So James, from your perspective, how did markets do last week?

[00:00:44] James Athey: Yes, it was a bit of a mixed bag, Nathan, very much solid performance from the large cap equity markets, Europe, UK, US, all, all appreciating fairly well, bit less positive when you start to look into small and mid cap. And as you say, really, the focus was on bond markets where we saw some pretty weak performance across the board.
In terms of currencies, really, it stands out that sterling was notably weak. Dropping, you know, around a percent versus both the dollar and the euro.

[00:01:14] Nathan Sweeney: Yeah. So if we look at the trade press, obviously, there's a lot of talk about borrowing costs in the UK going up. And obviously this is having an impact on different markets.
So what's happening in the bond space over the last week?

[00:01:26] James Athey: The short answer is a lot. Obviously, you know, growth, inflation expectations, as always play a significant role in the bond market and in driving bond yields. The economic data in the US continues to be pretty robust and that's been pressuring treasury yields higher and of course that has a significant influence on markets such as the UK. But beyond that there really are other challenges and concerns which have risen to the top of the agenda. Fiscal policy really in particular.

[00:01:55] Nathan Sweeney: Yeah, so it seems as if, you know, the UK has been particularly affected over the course of the last week. So why is that?

[00:02:01] James Athey: Yeah, it's a bit harsh in some sense because we do have a budget deficit.
So the government is spending more than it's earning in tax revenue, but certainly it's not as large in the UK as it is in the US or somewhere like France. But, you know, as I say, we're not seeing guilt yields rise in isolation. President Trump's is due to take over very soon. And, of course, lots of expectations about the potential for tariffs, the potential for tax cuts.
All of that has the potential to push inflation higher. And so investors have been dialing down expectations for interest rate cuts. from the Federal Reserve as a result.

[00:02:38] Nathan Sweeney: Okay. So it's not specifically unique to the UK. So it's been driven by some factors elsewhere.

[00:02:44] James Athey: Yeah, absolutely. That's not to say that there aren't specific challenges in the UK.
What we've seen in a worrying sense is that even though UK yields have been rising and actually been rising more than they have elsewhere. We've seen weakness in the currency and, that concerns investors because it starts to look like the dynamic that existed when Liz Truss was prime minister and we had significant volatility and weakness in bond markets, again, really focused on and centered on the sustainability of government finances.

[00:03:19] Nathan Sweeney: Yeah. So, and some of this is down to expectations for inflation. And so is that a concern? Should we be concerned about inflation pushing bond yields higher?

[00:03:29] James Athey: There are reasons to be concerned, but of course, what we have to do is we have to consider a multitude of factors and try and weigh them up. We can't be certain about what the future looks like, but we can try and assess things in terms of probabilities.
And our assessment continues to be that ultimately, the weakness of the economy, will bring inflation pressures down and that will allow the Bank of England to cut interest rates more than the market is pricing. So we see that side of things, in spite of the potential for concern, we see the likely outcome as being lower yields because of weaker growth, lower inflation and more easing from the Bank of England.
On the fiscal policy side, We do have, you know, ongoing concerns.

[00:04:16] Nathan Sweeney: Okay, so I suppose, you know, our listeners would be wondering, you know, as a result of everything that's been happening over the course of the last week, what's the impact for them?

[00:04:24] James Athey: Sure thing. Yeah, I mean, one good thing about bond markets is they have this negative feedback relationship.
And what I mean by that is that when bond yields increase, that tends to slow the economy. And a slowing economy tends to increase demand for government bonds, which causes yields to decline. So the rise in yields can lead to a fall in yields. So that's a bit of a circuit breaker, which can prevent things from getting out of control.
Of course, that won't happen instantly. So ultimately, we suspect that we might have to hear more from the Chancellor to help soothe markets, to comfort investors, the finances of the government are sustainable.

[00:05:11] Nathan Sweeney: Yeah, so ultimately with bond yields at higher rates, you're going to have some buyers coming in and saying, hey, look, this looks attractive, which will help to bring them back down.
What about portfolios? So is there any impact on portfolios? Is there any action being taken in portfolios as a result of any of this?

[00:05:28] James Athey: So you yourself know, Nathan, that we are investors, that we are seeking to invest over the long term, that we really try hard not to be unduly influenced by short term gyrations.
So Wherever possible, we seek to look through noise and try and focus on the signal, you know, the underlying fundamental outlook. And again, in that respect, we remain of the view that the economic outlook is sufficiently weak to justify bond yields, which are much lower than they are today. So we retain a bias to own government bonds and we see the UK bond market as increasingly offering attractive value. So we have a long position there as well.

[00:06:13] Nathan Sweeney: Okay. So, you know, big focus on bonds this week. Was there anything else happening in markets that we need to draw investors attention to last week?

[00:06:20] James Athey: Nothing particularly significant. The market has definitely had its mind elsewhere.
Economic data out of the US last week, certainly survey data. really does continue to suggest that the economy is bumping along quite nicely, that really any recessionary concerns are some distance in the future. And again, that's obviously helped to keep bond yields elevated. the big test is definitely going to be inflation data, both in the UK and the US.

[00:06:48] Nathan Sweeney: Okay. Yes. And is there anything else that we need to be aware of?

[00:06:51] James Athey: I think we're getting to the stage in UK markets where investors might be hoping to hear from some policy makers. We haven't heard much from the Bank of England recently. We did have some treasury spokespeople at the back end of last week, but really they didn't comfort markets very much.
So if disruption were to continue, if bond markets were to continue selling off, i. e. yields were to continue increasing, I think investors might expect that either the Bank of England or the Treasury or both might feel the need to comment to try and soothe investors concerns.

[00:07:26] Nathan Sweeney: Okay. Thank you, James. You know, some really, really good insight there and you can really see the added value of having James internal bond fund manager and that feed through into multi asset to be able to get his expert knowledge.
So thank you. I'm sure our listeners would really appreciate you coming on the show today and have a great week everybody.