Postulating that the gilt market currently trades with a degree of a Brexit risk premium hardly qualifies as searing insight.

The most recent aggressive shift downwards in gilt yields – implying almost zero chance of the Bank of England raising rates in the next 18 months – has largely been a function of the negative political reaction to the “Withdrawal Agreement” that the Prime Minister brought to Parliament last week. The political horse-trading that has begun will continue to envelop the debate over the coming weeks, prior to any “meaningful” vote taking place in Parliament (presumably in the middle of December if the most recent media coverage is to be believed).

As the political debate around the nature of the UK’s exit intensifies, attention will inevitably refocus on the economic prospects that any disorderly Brexit would bring. That economic activity would be severely damaged under a “No-deal” scenario is another statement that hardly qualifies as controversial. Less clear however is the likely gilt market reaction to such an outcome. In “normal” economic circumstances, such an economic shock would precipitate a fall in gilt yields and a dovish Bank of England response.

However, the probability of both domestic and especially international lenders to the UK requiring a higher risk premium in such a scenario is something that should not be dismissed. Given the current febrile political backdrop, a possible new (Labour) government that rips up the fiscal rule-book – and conventional economic wisdom around sustainable debt levels – is unlikely to preside over a compliant gilt market.

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