The recent UK election victory for the Labour Party under Keir Starmer has elicited diverse reactions from fixed income experts on British government bonds and the broader financial market.
This outcome, securing a large majority, brings stability to UK politics and could potentially transform the British government bonds landscape, as noted by Amundi. They emphasised that “Starmer’s election takes British government bonds a step closer to becoming a safe haven.” According to Amundi, this marks a change from the volatility since Brexit and Liz Truss’s short tenure. The Bank of England’s upcoming rate cuts and the UK’s limited fiscal flexibility make UK government bonds attractive compared to US, German and French counterparts, it added. While the UK credit market shows potential, increased issuance and market activity are needed. Despite a smaller global benchmark weight, UK fixed income offers appealing yields and diversification for international investors.
Mark Nash, Huw Davies and James Novotny from the fixed income – absolute return team at Jupiter Asset Management highlighted the comparative stability now evident in UK politics. According to them, despite Labour’s victory bringing stability, the new government must address the UK’s substantial deficits and low productivity. “There may be some renewed hope for better UK growth along with less inflationary pressure within the UK.
Despite the UK’s fiscal position, we believe Gilt yields look cheap compared to other countries that have a weak fiscal position (e.g. France) so there may well be some flows towards Gilts from other challenged sovereign bond markets that continue to have political problems now our election is done and dusted.” However, they also cautioned that improving public services and economic growth won’t be straightforward.
Kris Atkinson, portfolio manager at Fidelity International offered insights into the sterling corporate bond market. He observed that over half of the sterling investment-grade credit market is non-UK domiciled, making it less concentrated than its global counterpart. “The impact of this election is likely to be muted for sterling credit spreads. UK macro factors are a more important consideration for interest rate decisions over credit decisions. Coming into this election we were defensively positioned from a credit perspective, largely for valuation reasons rather than risks around the election result,” commented Atkinson.
Corporate bond spreads are currently tight, added Atkinson, but there are “valuable opportunities in investment-grade credit, especially in the securitised market and short-term credit (1-5 years)”. The water sector, however, faces ongoing volatility due to upcoming regulatory decisions on consumer price rises. If the government decides to reduce water company debt, it could significantly impact the broader water sector and other utilities. According to Atkinson, such actions would make financing UK infrastructure less appealing to bondholders, which isn’t ideal for any government.
David Zahn, head of European fixed income at Franklin Templeton, anticipates a period of political stability in the UK, allowing Labour to implement its agenda over the next five years. “We anticipate Labour wanting to maintain the fiscal responsibility without any major structural changes which should be supportive for UK Gilts, especially as we anticipate the Bank of England to embark on their interest rate cutting cycle,” said Zahn.
However, Zahn cautioned that the long-term political discord shouldn’t be underestimated.
Finally, Peder Beck-Friis from Pimco shared that he expects Starmer’s government to maintain tight fiscal policies. “This should facilitate a gradual decline in inflation and enable the Bank of England (BoE) to begin cutting interest rates soon – and potentially cut more than markets expect next year. Therefore, we believe UK government bonds (gilts) are attractive at current levels,” said Beck-Friis.
Overall, while the Labour Party’s victory introduces a period of political stability, experts underscore the importance of careful fiscal management and strategic economic reforms to navigate the UK’s existing challenges and leverage new opportunities.
