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Over the past few days, there has been a lot of talk about movements in the UK bond market. These government bonds are known as gilts, and the yield indicates what investors believe future interest rates will be. Long-term yields rose, with the 30-year government bond reaching its highest level since 1998. Here’s the impact it could have on UK shares.
There are many worries
It is important to note what the movement of gilts means. Investors are worried that the UK economy is in a period of stagnation. This means inflation without economic growth. GDP growth for Q3 was low. However the latest inflation reading at 2.6% was the highest since March 2024.
Because of this, some expect that interest rates will have to remain high to combat inflation. We also need to add to the mix concerns about financial stability. The government borrows money in gilts to pay a certain amount. However, as yields rise significantly, the cost of financing new bonds is very high. This raises doubts about how the UK will pay this high-interest bill as the authorities try to balance public finances.
If an investor has UK government bonds and is now worried, they may sell them. As a result, this lowers the price and increases the yield. It makes the problem worse!
Choice
So far, the stock market has not fallen due to concerns about the economic outlook and financial stability. But that doesn’t mean fears may not ease in the coming weeks or months.
What to do? One share that investors can consider buying as it may not be caught in this Games Workshop (LSE:GAW). The stock is not cheap and is up 35% in the past year.
It can tick the box because it has no credit. This means that if interest rates stay high for a long time, they will not have an impact because they do not have to borrow money.
In addition, it has no obligations or contracts with the Government. So if spending on independent contractors in other sectors is reduced, it doesn’t matter to Games Workshop.
Finally, the products and games it makes are not tied to sensitive customers such as say, location or automotive sectors. Their customers are rate sensitive customers with mortgages and car loans. And although Games Workshop’s customers may include such consumers, there is no direct result and the company should see a stable demand. Of course, another risk is that if inflation were to get out of control, it could increase the cost of production.
There is no reason to panic
At this point, I think it’s too early to say whether bond market events will spill over into stocks. But even if the stocks start to fall, I think that concerns about the state of the economy will have an impact especially on companies with strong ties to the Government or with high levels of debt. I’m not saying to completely write off such stocks, but it’s worth considering these points before investing.
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