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(Bloomberg) — Returns on UK government bonds are the highest in three months as tumbling oil prices offset investor concerns about unpredictable politics.
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Gilts have risen every day this week as Brent crude erased its wartime jump, easing inflationary pressures and reducing the possibility of interest-rate hikes from the Bank of England. A Bloomberg index tracking gilt returns for the year so far is back to its highest level since the early days of the US-Iran war.
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It’s a sharp recovery from mid May, when the index was showing a 3.5% loss, and came even as Prime Minister Keir Starmer resigned at the start of this week.
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“If oil stays low and collapses even further, the BOE can take it slow and eventually stay on hold for the rest of the year,” said Mizuho strategist Evelyne Gomez-Liechti. “Political uncertainty has been less of a story lately.”
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Gains for gilts mirrored moves in other developed markets as falling energy prices helped government bonds recover from their earlier losses. Brent was trading under $73 a barrel on Thursday as flows through the Strait of Hormuz ramped up following progress on a US-Iran peace deal.
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Ten-year gilt yields have fallen to around 4.7%, their lowest levels since mid-March.
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Burnham’s Picks
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Starmer’s departure cleared the path for Makerfield MP Andy Burnham to succeed him as leader of the Labour Party. Now, investors are focused on who Burnham might pick as chancellor, and what their stance on the UK’s fiscal rules will be.
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“You’re probably going to get a period of time in which the market does give some benefit of the doubt,” said Jason Borbora-Sheen, Portfolio Manager at Ninety-One, pointing to the team of advisers in Burnham’s entourage.
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“The fact that you have people like Jim O’Neill, who’s ex-Goldman Sachs, you have Andy Haldane, ex-Bank of England in the conversation, provides — I think — enough of a potential boost for gilts,” said Borbora-Sheen, who is long UK government 10-year bonds.
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—With assistance from James Hirai and Alice Gledhill.
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