Here’s what the crazy moves in the bond market could mean for UK shares

Over the past few days, there’s been a lot of chatter about movements in the UK bond market. These Government bonds are known as gilts, with the yields being reflective of where investors believe future interest rates could be. Long-term yields have jumped, with the Government bond maturing in 30 years hitting the highest level since 1998. Here’s the impact it could have on UK shares.

Worries galore

It’s key to note what the movement in gilts is signifying. Investors are concerned that the UK economy is in a period of stagflation. This means rising inflation without economic growth. Q3 GDP growth was flat. Yet the latest inflation reading at 2.6% was the highest since March 2024.

Due to this, some expect that interest rates will have to remain high to counter inflation. We also need to add in the mix of concerns around fiscal stability. The Government borrows money via gilts in order to fund some spending. Yet with yields rising so much, the cost to finance new bonds is significantly higher. This calls into question how the UK is going to afford this higher interest bill when the authorities are trying to balance the public finances.

If an investor owns UK Government bonds and is now worried, they might sell them. As a result, this pushes the price down and the yield up. It makes the problem even worse!

Being selective

So far, the stock market hasn’t fallen due to the concerns about the economic outlook and fiscal stability. But that doesn’t mean that the fear might not cause a drop in the coming weeks or months.

What to do? One share that investors could consider buying as it might not get caught up in this is Games Workshop (LSE:GAW). The stock isn’t cheap and is up 35% over the past year.

It could tick the box because it has no debt. This means that if interest rates stay higher for longer, it’s not going to be impacted as it doesn’t need to borrow money.

Further, it has no ties or contracts with the Government. So if spending with private contractors in some sectors is cut, it doesn’t matter to Games Workshop.

Finally, the products and games it makes aren’t tied to rate-sensitive customers in as, says, the property or the automotive sectors are. Their customers have rate-sensitive customers with mortgages and car loans. And while Games workshop clients may also include such consumers, there’s less of a direct effect and the company should see fairly stable demand. Of course, one risk is that if inflation was to get back out of control, it could increase the costs of production.

No reason to panic

For now, I think it’s too early to tell if the events in the bond market are going to spill over to stocks. Yet even if stocks do start to fall, I think the worry around the economic outlook will primarily impact companies that either have strong ties to the Government or that have high debt levels. I’m not saying to completely write off such stocks, but it’s just worth considering these points before investing.

The post Here’s what the crazy moves in the bond market could mean for UK shares appeared first on The Motley Fool UK.

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Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has recommended Games Workshop Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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