UK gilt market risks remain tied more to global shocks than Westminster politics

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UK gilt market and global shocks

Highlights

Ten-year gilt yields rose from 4.23 per cent in late February to 5.20 per cent by late April, mainly driven by global oil-price fears and bond market volatility.
A National Institute of Economic and Social Research report finds that political risk added only 0.06 percentage points to longer-dated gilt yields, highlighting global factors as primary drivers.
Cooling UK labour market data and easing oil price concerns have reduced expectations for a Bank of England tightening cycle, supporting gilt yields' relative attractiveness to international peers.

Global drivers behind recent gilt moves

As reported by Financial Times, the recent sell-off in gilts through March, April and May is presented as being driven chiefly by the closure of the Strait of Hormuz, oil-price fears and wider volatility across global bond markets, rather than by UK political developments.

Before the U.S. and Israel attack Iran, and while the strait is still operating normally, ten-year gilt yields dip to 4.23 per cent in late February. By late April, amid fears of a major oil shock, they climb to 5.20 per cent. Because the UK electricity market is highly exposed to international energy prices, a jump in oil costs feeds quickly into inflation expectations and changes market views on Bank of England policy.

Markets that had previously expected interest-rate cuts in 2026 instead move to price in several rate hikes, while the Bank of England does not strongly push back against that shift. A report from the National Institute of Economic and Social Research at the end of May finds that most of the increase in yields comes from oil-price moves and broader global bond turbulence, with increased political risk adding only 0.06 percentage points to longer-dated gilt yields.

Why political fears look overstated

Concern in markets centres on the possibility that a more leftwing successor to Keir Starmer could loosen fiscal policy, raise borrowing and push inflation higher. Burnham's earlier remarks about not being "in hock" to bond markets also unsettle some investors, especially after the lasting impact of the 2016 Brexit vote and the 2022 Liz Truss crisis on perceptions of UK political risk.

Yet the current macro backdrop looks less threatening than it does a few weeks ago. The risk of oil surging toward $150 a barrel has eased, and recent UK labour-market data shows limited signs of inflation pressure, with activity appearing sluggish and pay growth cooling.

That weakens the case for an aggressive Bank of England tightening cycle and supports the view that gilt yields still look relatively attractive against many international peers. Even if Burnham adjusts fiscal rules in coming years, that would not be unusual in the UK, where such rules have changed multiple times since 2010. The bigger point for investors is that a repeat of the Truss-era shock is not seen as likely, meaning fears about Westminster's effect on gilts appear exaggerated.

Our earlier coverage of Andy Burnham’s expected transition into office looked at how he would need to turn broad campaign pledges into workable policy details, with fiscal rules and funding questions at the centre. We highlighted delivery and budget risks across areas such as public control of utilities, housing, welfare reform and industrial policy, and how unresolved trade-offs could shape market perceptions of future UK borrowing and inflation.

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