Allianz, Royal London Back UK Gilts, Expecting Fiscal Prudence After 2022 Rout
Major Investors Bet on UK Bonds Amid Political Uncertainty
By Yoruk Bahceli and Alun John
LONDON, May 15 (Reuters) - Allianz is sticking with a bullish bet on UK bonds and Royal London is buying more, as major buyers of British government debt bet that memories of a gilt market meltdown in 2022 will curb the fiscal ambitions of any potential new prime minister.
Britain's bond market has been rattled since the ruling Labour Party suffered sweeping losses in local elections last week, throwing Prime Minister Keir Starmer's future into doubt.
Political Risks and Market Reactions
Ten-year gilt yields hit their highest since 2008 on Friday, as a path opening up for Manchester Mayor Andy Burnham to challenge Starmer added to worries that a new, more left-wing leader would raise spending.
Burnham irked investors last year with his comment that Britain needed to move beyond "being in hock to the bond markets". He has suggested defence spending could be increased by putting it outside fiscal rules that limit borrowing and wants tax cuts for low earners and to raise the top rate of income tax.
Impact of the 2022 Gilt Rout
The memory of 2022's gilt rout that forced then Conservative Prime Minister Liz Truss out of office in less than two months would limit any new leader's hand, the investors said.
Truss's budget of unfunded tax cuts, coupled with fire sales by pensions funds, sent gilt yields an entire percentage point higher within a week in 2022.
Investor Perspectives on Fiscal Policy
"We've been here, this road, multiple times now, since the end of 2022, since the Liz Truss government. The UK is going to be consistently tested by the markets to maintain this (tight fiscal) policy stance," said Ranjiv Mann, lead portfolio manager at Allianz Global Investors, which manages 591 billion euros ($688 billion).
"That remains the core to our view," said Mann, who holds a position favouring 30-year gilts against U.S. Treasuries.
Market Dynamics and Investor Strategies
Beware the 'Bond Vigilantes'
Gilt yields are the highest among major economies, as the country struggles with anaemic growth and persistent inflation, while the energy price shock from the Iran war poses a fresh challenge to Britain's stretched finances.
Craig Inches, head of rates and cash at Royal London Asset Management, said they had bought UK bonds, believing yields at current levels were unlikely to be sustained given the impact on Britain’s fiscal headroom and debt costs. A fall in yields would mean bond prices rise.
"We have increased our position in gilts, as what the market is pricing seems unsustainable over the longer term, both from a fiscal headroom and debt financing perspective," he said.
"Burnham will need to be very gilt market friendly in his comments, otherwise the UK headroom will have disappeared before he gets to No. 10. It will be his chance of leadership that will be 'in hock' to the bond market."
Other Asset Manager Views
Ariel Bezalel, fixed income investment manager at Jupiter Fund Management, said he had reduced some exposure to gilts in April, but still held a "decent" amount in short- and medium-dated bonds given high yields and cautious signs from potential leadership candidates.
"Bond vigilantes I think will ensure that the UK government will be careful in terms of not going overboard on fiscal plans," said Bezalel.
Burnham has said his comments last year did not mean he thought bond markets should be ignored, but that growth-boosting policies would reduce public costs.
Former Deputy Prime Minister Angela Rayner, another potential candidate also seen as on the so-called soft left of the Labour Party, provided investors with a reassuring message on the public finances on a call, the Financial Times reported in March.
Market Outlook and Future Scenarios
A senior trader at a U.S. bank said he was seeing a lot of interest in gilts, with investors considering the right time to buy.
A rise in 30-year gilt yields to 6%, from around 5.8% now, would make them attractive, said Monica Defend, head of the investment institute at Amundi, Europe's largest asset manager.
"We don't think that there is the potential for a Liz Truss moment," she said.
"Even a left-wing Labour leader will not want to increase the deficit," said Defend, adding that taxes would likely rise with spending.
(Reporting by Yoruk Bahceli and Alun John; editing by Dhara Ranasinghe and Alex Richardson)
