UK Political Risk: From Help to Hindrance

UK political risk has shifted from a source of stability to a hindrance, contributing to a higher term premium and volatile gilt yields. Despite anticipated Bank of England rate cuts, long-term borrowing costs are expected to stay elevated due to fiscal credibility concerns and rising geopolitical risks.

Key Takeaways

• 1.UK political risk has transitioned from a factor that compared favorably to continental peers to a primary source of market volatility and yield pressure.
• 2.Gilt yields are expected to remain high despite forecasted BoE rate cuts, driven by a rising 'term premium' reflecting fiscal and geopolitical uncertainties.
• 3.The 2025 Budget faces credibility concerns due to front-loaded spending and back-loaded tax increases scheduled near the next general election.

Table of Contents

• UK political risk moves from help to hindrance
• UK gilt yields rose more than peers' from the 2024 election to Q3 2025
• Upside risk to gilt yield outlook due to Budget 2025 credibility concerns
• Political risk surges interact with fiscal worries and drive gilt yields up
• Three key UK political risk considerations for the gilt yield outlook
• Conclusion: continued volatility and upside risk to interest rates

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