Market review
At the beginning of the quarter, we felt there was an appetite for continued cuts on a quarterly basis. The Monetary Policy Committee (MPC) cut rates by 25 basis points in August, bringing the UK bank rate to 4%. While the move was not considered a surprise, it was widely viewed as a hawkish cut given the voting and subsequent commentary.
By the September meeting, however, the MPC was more cautious, with sticky inflation, industrial action and a cooling labour market giving the Bank pause for thought in continuing its easing cycle. MPC members remain divided on policy direction. Governor Andrew Bailey has suggested rate cutting is not over, but others see no changes until at least mid-2026. We believe there will be no further cuts this year, and that any further easing will be strictly data-dependent.
The market has retained some stability after the turmoil that followed ‘Liberation Day’, and UK markets benefited initially from US banks selling off. Overall, the market was largely flat, with limited opportunities to enhance returns.
Fund activity
During the third quarter we saw a tick up in the five-year gilt curve, partly driven by borrowing costs and partly by inflation. With this in mind, we reduced exposure to our longer-dated fixed income positions to avoid rate risk, and reallocated funds into shorter maturities and floating rate notes (FRNs). However, we’ve selectively added FRNs at the five-year point where spreads remain attractive, including a Coventry covered bond at SONIA +53.
This positioning reflects the relatively flat curve. There is limited additional return from extending maturity, but over the next few months we will remain opportunistic in adding value where the risk versus reward position is compelling.
Outlook
We anticipate a prolonged pause at 4% and remain cautious on the near-term outlook. While markets expect a single cut in early 2026, our base case is for no change this year. We believe there is a shift away from an environment of regular movements seen in the recent hiking and cutting pattern. Any adjustment to the cycle will be data-driven, and could result in multiple moves in either direction, depending on inflation, growth and fiscal developments. We’re cautious, but also opportunistic.
Our strategy remains focused on quality, liquidity and genuine value, rather than chasing yield and exposure for its own sake. We continue to favour sovereign, supranational and agency (SSA) and covered bonds.
Important Information
The value of investments may fall as well as rise and investors may not get back the amount invested.
The views expressed in this document are those of the fund manager at the time of publication and should not be taken as advice, a forecast or a recommendation to buy or sell securities. These views are subject to change at any time without notice.
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