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Derek Halpenny at MUFG highlights that United Kingdom (UK) Gilt yields have jumped sharply, echoing past episodes of political and fiscal stress, with long-end Gilts still elevated versus pre‑2011 levels. He flags rising political uncertainty around UK local elections and Labour leadership risks, and sees increasing downside risks for the Pound over coming months, especially if Middle East tensions lift crude Oil prices.
Gilt selloff and UK politics weigh
“The price action in the UK Gilt market yesterday was certainly reminiscent of previous episodes of political and fiscal uncertainties that prompted heavy bond market selling. The 10-12bp jump in Gilt yields across the curve in part reflected catch-up after yields increased on Monday when the UK markets were closed but the jump in yields yesterday was much more than the moves in Bunds or US Treasuries on Monday that pointed to further underlying reasons for the Gilt market sell-off.”
“More political instability could be on its way and investors could well be positioning for the potential for renewed political instability that could follow Thursday’s local elections. Polymarket shows a near 70% implied probability of PM Starmer not surviving through to the end of 2026, close to recent highs.”
“Current polling (pollcheck.co.uk) estimates Labour to lose 1,164 council seats (from 2,303); the Tories to lose 563 seats while the Lib Dems gain 121 and the Greens 456. Reform are the big winners gaining 1,401 seats. Some polls suggest Labour could do a lot worse.”
“Still, uncertainties are high and in the context of potentially months of renewed political uncertainty, we continue to see increasing downside risks for the pound especially if crude oil prices rise sharply on the back of re-escalation in the Middle East.”
