U.K. government bonds could plunge if the Labour Party pulls off a shock upset in Thursday’s election, causing yields to almost double.
With the latest polls showing the gap between Prime Minister Theresa May’s Conservative Party and Jeremy Corbyn’s Labour narrowing, analysts are reworking their scenarios for gilts. Deutsche Bank AG and Citigroup Inc. would turn bearish if the opposition wins, while Axa Investment Managers went short on gilt futures and long U.S. Treasury futures last week, hedging what is still seen as an outlier scenario.
“We expect to see quite substantially higher gilt yields and that is simply because if the Labour party is elected there’s an expectation that they are going to invest a lot in infrastructure projects, the NHS, and that will warrant a big pick-up in gilt issuance,” said Nicolas Trindade, a senior portfolio manager for Axa, which oversees 747 billion euros ($840 billion) in assets. “It would also mean a steeper yield curve.”