Our views

Bond market reaction to general election announcement


Ewan McAlpine, Senior Client Portfolio Manager

19 April 2017

In a move that caught almost everyone by surprise, Prime Minister Theresa May, leader of the Conservative party, has called for a general election on 8 June 2017. While she still needs to gain approval from parliament in order to proceed, Jeremy Corbyn, leader of the Labour Party has already indicated that he will support the motion.
The news that May was to make an announcement caused a small rally in gilts, which was partially reversed, and a small sell-off in sterling, which was more than fully reversed once she made her announcement and markets digested the detail over the day. On top of geopolitical risks around Syria and North Korea, and political risks in relation to French and German elections, we now have an additional layer of home-grown political risk influencing market behaviour, at least in the short term. Incrementally, the additional risk is probably relatively small. Polls suggest that the Conservatives will win a comfortable majority but the clear lesson from 2016 was that polls are not always accurate. 
On a fundamental basis, we do not expect to change our strategies. This announcement will cause any near-term uncertainty around the economy to persist and probably means that rates and yields stay depressed for slightly longer, but we still believe that gilt yields are too low and hence a short duration stance is appropriate. It is likely to provide tactical opportunities, particularly when looking at gilts relative to other major bond markets. In our sterling credit portfolios, we have a long-held bias towards secured assets and neither the announcement of an election nor the different potential outcomes will alter this.

In a move that caught almost everyone by surprise, Prime Minister Theresa May, leader of the Conservative party, has called for a general election on 8 June 2017. While she still needs to gain approval from parliament in order to proceed, Jeremy Corbyn, leader of the Labour Party has already indicated that he will support the motion.

The news that May was to make an announcement caused a small rally in gilts, which was partially reversed, and a small sell-off in sterling, which was more than fully reversed once she made her announcement and markets digested the detail over the day. On top of geopolitical risks around Syria and North Korea, and political risks in relation to French and German elections, we now have an additional layer of home-grown political risk influencing market behaviour, at least in the short term. Incrementally, the additional risk is probably relatively small. Polls suggest that the Conservatives will win a comfortable majority but the clear lesson from 2016 was that polls are not always accurate. 

On a fundamental basis, we do not expect to change our strategies. This announcement will cause any near-term uncertainty around the economy to persist and probably means that rates and yields stay depressed for slightly longer, but we still believe that gilt yields are too low and hence a short duration stance is appropriate. It is likely to provide tactical opportunities, particularly when looking at gilts relative to other major bond markets. In our sterling credit portfolios, we have a long-held bias towards secured assets and neither the announcement of an election nor the different potential outcomes will alter this.

The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.