Bond Watch: Labour landslide calms bond markets

Welcome to interactive investor’s ‘Bond Watch’ series, covering the latest market and economic news – as well as analysis – that is relevant to bond investors.           

Our goal is to make the notoriously complicated world of bond investing simpler, by analysing the week’s most important news and distilling it into a short, useful and accessible article for DIY investors.              

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Investors welcome Labour majority

Bond and currency markets were largely unmoved following the result of the UK general election, in which Labour won a large majority.

Gilt yields are between 4.1% and 4.6%, depending on the maturity date. Generally, longer-dated bonds are yielding more than shorter-dated ones.

The result was expected, with polling since the election was announced by Rishi Sunak pointing to a strong Labour win.

In the build-up to the election, market analysts said the large majority for Labour would be welcomed by markets, as the new government had pledged to be fiscally conservative and there would likely be stability for five years with regards to the prime minister and chancellor.

Deutsche Bank says that the focus now moves to what Keir Starmer says on his 17 July King’s Speech: “Here, markets will get a real sense of Labour’s key policy priorities for its first year in government, including potentially what could feature more heavily in its Autumn Statement,” it said.

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The bank says that while the Labour Party’s manifesto pledges amount to very little additional public sector spending, more important for the economy (and markets) will be the policy measures Labour has yet to fully flesh out.

“Here, four things matter most: investment (via its National Wealth Fund), defence, planning reform, and trade with Europe. These pose meaningful upside risks to GDP growth, including potential growth,” the bank said.

On the opening bell, UK stock markets also welcomed the result with the international-focused FTSE 100 rising 0.25%, taking its five-day gain to more than 1%. The FTSE 250, which contains the next-largest companies but is more domestic-focused, rose more, adding 1.3%, and is now up about 3% over the past week.

Laura Foll, UK shares portfolio manager at Janus Henderson Investors, says that the Labour victory has the potential to renew investor appetite for UK equities and reduce barriers to trade with the European Union. 

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Foll adds: “Ahead of the election, the Labour Party had been clear in its focus on reinvigorating UK economic growth as a way to ‘square the circle’ of improved funding for public services while remaining within its borrowing commitments. This aligns the interests of the UK equity market and the incoming government.

“Higher UK economic growth would be a ‘clear positive’ for domestically focused equities, as it would create the potential for higher sales and earnings growth.”