The Borrowers
August witnessed a late and large increase in the price that heavily indebted governments pay to borrow and service their outstanding debt. The rise was the result of renewed hostilities between the US and Iran and fears for inflationary consequences of higher oil and food prices.
This rise in bond yields was most notable in the US, Japan, France and the UK, where the price of outstanding debt fell sharply as a consequence of those rising yield levels. For context, as September started, the ten-year UK gilt yield was 5.25%, up from 4.90% in early August and a low of 4.25% at the end of February this year. Bond investors are demanding to be paid more to buy the debt of those countries which need to fund large and increasing budget deficits.
Such large moves in the yields of longer dated government debt can have consequences for businesses, especially companies that need to finance their expansion through bond issuance. Many of the large technology companies have used significant bond issuance to fund their capital expenditure on artificial intelligence (AI) related data centre construction. As corporate bonds are priced relative to government bonds, their cost of borrowing has increased too.
Equities have been supported by earnings results from US companies exceeding expectations. Second quarter earnings for most US businesses are reported in July and August. The world’s largest company and one that is at the hub of the AI revolution, Nvidia with a market capitalisation of US$5.3 trillion, gave a boost to equities on August 26th with impressive earnings, far exceeding market estimates.
The US Dollar was weaker in August in response to the US Treasury’s attempts to keep a lid on US Treasury bond yields by buying ten-year and thirty-year bonds from the market. Scott Bessent, the US Treasury Secretary, is keen for thirty-year bond yields not to rise as US mortgage rates are priced relative to those yields. A significant rise in mortgage rates in the US will dampen US housing activity where most US consumers are already struggling with cost-of-living increases as they are in the UK.
A beneficiary of a weaker US currency and a lack of a resolution in the Middle East, has been gold which rose 12% on the month. Oil prices rebounded in August.
Please remember that past performance does not predict future performance and it should not be the main reason for making an investment decision. The value of investments and income from them can fall as well as rise. The performance of Model Portfolios may differ from their performance shown above for several reasons including differences in the timing of an initial investment and subsequent portfolio changes, and also the availability of certain funds on various platforms.
