Schroders Stays Clear of UK Bonds, Citing Risk Starmer Is Ousted

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(Bloomberg) — A Schroders Plc bond-fund manager is steering clear of UK debt on concern that political upheaval will drag yields higher in the coming months. 

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James Ringer, a fund manager at the London-based firm, is among investors worried that Prime Minister Keir Starmer will be ousted in favor of a new leader more willing to increase fiscal spending. While 10-year yields around 5% are close to the highest level since 2008, he said that’s still not enough compensation to resume the firm’s previously bullish view on gilts. 

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“We’ve seen this play before where the UK looks cheap and it only gets cheaper,” Ringer said in an interview. “We’re happy to be on the sidelines.” 

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Starmer is fighting to stay in 10 Downing St. after an historic election defeat last week for his Labour Party deepened concerns about the prime minister’s unpopularity. That’s a risk for bond investors, who view Starmer and his Chancellor of the Exchequer Rachel Reeves as more committed to keeping bond sales in check than their potential replacements. 

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Ringer, who is part of the firm’s unconstrained fixed-income team, was until recently positive on UK debt based on the view that the jobs market was slowing, justifying Bank of England interest-rate cuts. They closed that position in early March as the US and Israel’s war on Iran jolted energy markets and sent bond yields soaring, with swap markets now positioned for BOE hikes instead of cuts. 

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The news since last week’s election results has made it “even harder” to take a stance on gilts, he said. The ranks of Labour members of Parliament urging Starmer to either step aside or make a plan to leave continued to grow on Monday, despite his warnings that a leadership contest would plunge the country into chaos. 

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One widely-touted challenger is Manchester Mayor Andy Burnham, who has criticized the government’s economic approach, claiming the country is “in hock” to the bond markets. Though Burnham said his comments were taken out of context, it nonetheless spooked investors.

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“They’re trying to pave the way for Burnham to be in Number 10,” Ringer said of the anti-Starmer lawmakers.  “Whether it’s true or not, the received wisdom is Burnham will be gilt negative.”

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Schroders manages about $1.1 trillion. Nuveen tabled a £9.9 billion ($13.5 billion) takeover of the firm earlier this year, which is expected to create one of the biggest global investment firms specializing in actively-managed strategies. 

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Ringer said his team’s mandate allows them to focus on other jurisdictions with less political volatility. That’s at a time when the gilt market is increasingly relying on more price-sensitive global investors amid waning demand from domestic pension funds.

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“Canada also has a weakening labor market, but it also has lower inflation and doesn’t have the same fiscal issues,” Ringer said. “It’s not as if there aren’t other opportunities at the moment.”

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