UBS pitches UK gilt sell-off as opportunity rather than crisis Proactive uses images sourced from Shutterstock
UBS says the political storm around Prime Minister Keir Starmer has pushed UK assets back into focus, but the Swiss bank sees the gilt sell-off as more opportunity than crisis.
The bank’s UK-based analysts, in a note on the market implications of Labour’s leadership turmoil, said speculation over Starmer’s future had intensified sharply after last week’s local elections, with more than 80 Labour MPs publicly or privately backing calls for him to resign or set out a timetable for departure.
Four cabinet ministers have also resigned, though more than 100 Labour MPs have signed a letter backing the prime minister.
Under Labour rules, UBS noted, a leadership challenge would require a sitting Labour MP to secure nominations from 20% of Labour MPs, currently 81 backers.
The process of a Labour leadership challenge would likely be lengthy, according to UBS analysts Dean Turner and Maelle Quillevere, who note that Starmer’s 2020 leadership election took around four months, and suggested any route involving Manchester mayor Andy Burnham would probably add at least another month.
For markets, the UBS analysts reckon the risk of a new leader and chancellor pursuing “fiscal adventurism” that alarms investors is low.
UK government bonds have been under pressure, with 30-year gilt yields reaching 28-year highs, but UBS said the move has broadly tracked global bond markets rather than reflecting a uniquely British shock.
Markets now price in around 75 basis points of Bank of England rate rises over the next 12 months, a reversal from earlier expectations for cuts.
UBS expects rates to stay on hold for longer, with cuts delayed until early 2027, and sees an opportunity to lock in yields in quality short- and medium-dated GBP bonds.