The spread between 10-year and 2-year Gilt yields has turned positive for the first time since May 2023. This shift is due to a decrease in 2-year yields and an increase in 10-year yields. Market analysts are predicting a potential rate cut by the Bank of England by September, but there is also speculation that under a potential Keir Starmer government, increased fiscal spending could impact long-term yields. Short-term bonds are currently seen as a more attractive investment option due to their lower risk and favorable yield compared to long-term Gilts.
The recent change in yield curve inversion was expected by the market, but its timing is significant as the UK elections approach. The drop in 2-year yields and the rise in 10-year yields are key factors driving this adjustment. Market participants are now considering the possibility of a Bank of England rate cut as early as August, with expectations of a 25 basis point cut by September. In the long term, a potential Keir Starmer victory could lead to increased investments to achieve an economic growth target of 2.5%. This could result in less aggressive interest rate cuts, putting pressure on long-term Gilts. Additionally, heightened fiscal spending may lead to inflationary pressures, further impacting long-term Gilts.