Monthly Bond Commentary - August 2025

Long-end government bond yields have risen markedly over the last two months, especially in Europe. This has prompted some in the media to speculate over the health of these markets and governments; particularly in the UK. We strongly believe this negativity is overly dramatic and not based in fact. That being said our decision to limit exposure to the long-end of the yield curve has been validated as the yield on 20-year bonds across developed economies reached their highest in decades and the highest on record in Japan. We are therefore pleased to report another set of strong results for our portfolios in spite of the recent government bond price action. Our portfolios have all outperformed the benchmark year-to-date, over a 1-year horizon and since inception.

We believe the factors driving the movement at the long-end are worth dissecting so as to understand how the curve may evolve in the future. We can point to poor fiscal health and slow growth for many economies, which has a greater impact on the long-end while monetary policy dominates movements at the shorter-end. But this is not new - Europe has had sluggish growth for some time. We in fact see complementary structural shifts in the buyers of 20+ year bonds. Historically, the largest purchasers have been defined benefit pension schemes (DB schemes), now going the way of their beneficiaries, and central banks. However, both have reduced their purchases in recent years. DB schemes are no longer accepting new members and central banks have shifted some of their bond purchases into gold. This shift from central banks has helped push the gold price to a series of all-time high prices over the last 18-months. While we do not know the minds of central bankers we do not see a reason for a reversal of this rebalancing. So, the world may have to become accustomed to steeper yield curves and a higher cost of long-term debt.