BNY’s Geoff Yu argues that changing gilt ownership patterns limit downside for the Pound (GBP) even as United Kingdom (UK) fiscal risks rise. Foreign investors have already reduced exposure, leaving domestic buyers dominant. While markets price stronger fiscal impulse after local elections, BNY expects any fiscal loosening to avoid a repeat of 2022’s minibudget shock for GBP.

Gilt ownership shifts temper Pound risk

"If we assume that inflation premia will be reduced across European government bond curves, then fiscal premia will return to the fore, and this is where the challenges for the gilt market will be more pronounced."

"Depending on local election results, markets are pricing in policy uncertainty, with most scenarios tilting toward a stronger fiscal impulse."

"Even if fiscal loosening is the outcome, we don’t foresee an impact along the lines of the 2022 minibudget shock, and GBP’s downside may be more contained this time."

"Our data indicate that aggregate gilt demand is at its highest levels in years – yet gilt selling by cross-border investors also hit multi-year highs."

"If the months ahead point to a need to add to U.K. fiscal risk via gilts, cross-border institutional investors likely do not have the scale to do so."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)