Major global asset managers Allianz Global Investors and Royal London Asset Management are maintaining bullish positions on British bonds, betting that the recent market volatility and the memory of the 2022 gilt crisis will compel any future UK leader to exercise fiscal restraint. This comes as Britain’s bond market has experienced renewed jitters following the Labour Party’s significant losses in local elections last week, casting uncertainty over Prime Minister Keir Starmer’s leadership. Allianz Global Investors is a global asset manager that oversees substantial funds across various asset classes for institutional and retail clients worldwide, managing 591 billion euros ($688 billion).
Ten-year gilt yields saw their sharpest rise in over a year last Friday, reaching levels not seen since 2008. This surge was fuelled by speculation that Manchester Mayor Andy Burnham could challenge Starmer, intensifying investor concerns over a potentially more left-wing leadership that might advocate for increased spending. Burnham previously voiced a desire for Britain to move beyond being “in hock to the bond markets” and has suggested increasing defence spending outside fiscal rules, along with tax adjustments favouring lower earners and a higher top income tax rate.
Despite these political headwinds, Ranjiv Mann, lead portfolio manager at Allianz Global Investors, affirmed their view, stating, “The UK is going to be consistently tested by the markets to maintain this (tight fiscal) policy stance.” Similarly, Royal London Asset Management, the asset management arm of Royal London, manages investments for its policyholders and a range of institutional clients, and has increased its holdings in UK bonds. Its head of rates and cash, Craig Inches, believes current yields are unsustainable over the long term, adding that any new leader like Burnham would need to be “very gilt market friendly.”
Other market participants echo this sentiment. Ariel Bezalel of Jupiter Fund Management, while having trimmed some gilt exposure, still holds a “decent” amount, expecting “bond vigilantes” to ensure fiscal prudence. Monica Defend from Amundi, Europe’s largest asset manager, suggested that 30-year gilt yields at 6% would be attractive. She concluded that even a left-wing Labour leader would likely shy away from significantly increasing the deficit, anticipating potential tax increases rather than unchecked spending.
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