Long-Dated Gilt Yields Could Fall After Budget — Market Talk

What happened

UBS Global Wealth Management rates strategist Mustafa Caylan said in a webinar that yields on long-dated U.K. government bonds, or gilts, could fall because fiscal consolidation looks likely in Wednesday's budget, and UBS recommends buying 10-year gilts.

Confirmed

Global impact / market context

Lower long-dated gilt yields would mean the U.K. government pays less to borrow money over long periods, which can feed into borrowing costs for companies and households and support bond prices for investors who already hold gilts.

Analyst inference

A 15-20 basis point fiscal risk premium, meaning extra yield investors demand for budget uncertainty, has been priced into gilts since the start of the year. UBS expects modestly higher deficits than in spring but still sees gilts outperforming.

Analyst inference

What to watch

1. Watch Wednesday's budget for fiscal consolidation, which means tax rises or spending restraint that reduces government borrowing, since UBS says this outcome could push long-dated gilt yields lower. Confirmed
2. UBS recommends buying 10-year gilts, a trade that would profit if long-dated yields fall more than shorter-dated ones, so watch whether that curve move actually happens. Proposed
3. Track whether the 15-20 basis point fiscal risk premium shrinks after the budget, which would show investors demanding less extra yield, which means the additional return, for budget uncertainty and support the UBS view. Analyst inference

Evidence

• Original source link unavailable