Why Aviva is buying now
Aviva Investors has been leaning further into UK government bonds, picking up 10-year gilts over the past week to build on an existing overweight. In an interview with Bloomberg News, senior portfolio manager Steve Ryder said that with yields around multi‑decade highs, Britain's fiscal vulnerabilities look "well priced." UK debt makes up the primary long position in the bulk of Aviva Investors' fixed‑income mandates.
Ryder's read on the politics is plain. "Each additional move higher in yield puts additional pressure on UK finances ahead of the budget," he said. "It constrains what the government can do." He added, "There's going to need to be some adjustments, but beyond that our base case is that it's a reasonably balanced budget."
What the market is signaling
Ten-year gilts traded at 5.15% on Friday, sitting just below a 19-year high from Tuesday. Thirty-year yields climbed midweek to levels last seen in 1998 as a renewed oil spike helped trigger a worldwide bond selloff. That backdrop narrows the room for fiscal giveaways, with Oct. 28 looming for Healey's budget.
Bloomberg Economics reckons the recent yield jump slices about £12 billion off the government's cushion against its fiscal rules. Prime Minister Andy Burnham has vowed to adhere to those rules, under which routine government outlays must be covered by tax revenues in 2029. That could leave less scope to lift areas like defense.
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Market plumbing looks calmer than the headlines suggest. Asset-swap spreads, a popular gauge of supply anxiety, have held broadly steady, pointing to inflation and rate expectations as the main forces behind the selloff rather than fear about the UK's credit story. Ryder also sees gilts' reaction to energy prices starting to level out, and says potential rule changes that give banks more room to buy gilts would be another support. "Probably all of those factors outweigh any concerns that the market might have going into the budget," he said.
Positioning for rate risk
The next swing factor is the Bank of England. With inflation still above target, derivatives pricing points to nearly three quarter‑point hikes over the coming year. Aviva Investors' base case is that the BOE eventually eases, but Ryder has adjusted short‑maturity exposure to the two‑year forward one‑year rate. In other words, it references the market's view of the one‑year rate two years ahead, helping dampen exposure to immediate policy shocks.
What this could mean for your money
Higher yields, tighter fiscal space and a BOE that might still tighten a bit create a different risk‑reward mix for gilts than we have seen in years. If risk premia and potential bank demand keep supporting prices while budget jitters stay contained, gilts can behave less like a political headline and more like a straightforward income asset. That is the setup Aviva is leaning into.
