James Lynch – Investment manager at Aegon Asset Management

The yield on 30-year gilts has surged to its highest level since May 1998, reflecting investor anxiety over what might follow a potentially poor showing for Labour at the polls.

James Lynch, investment manager at Aegon Asset Management, noted that the relationship between UK politics and gilts has been a persistent theme since 2022.

He explained: ”For the Gilt market, it is not that there is a binary good/bad outcome of the regional and local elections this Thursday, it’s what comes next.

“How many seats the Green party or Reform get is not going to impact the Gilt market. What is going to impact the Gilt market is the fiscal policies of the government of the day and that is of course down to the leadership.

“If there is a change of leadership of the Labour party because of the results of the regional and local elections, that is where the elections will become consequential.”

He added: ”Will there be a leadership change? The market does think the results of the elections will matter, but it’s not the only variable, it needs a leadership challenge to materialise.

“If the results of the elections are a disaster for the Labour party but no leadership challenge occurs or no cabinet reshuffle that removes Reeves as Chancellor – then the Gilt market will move on.

”However, there is an acknowledgement that change does seem inevitable, whether the election results is the final catalyst or not we will have to wait and see.”

What truly matters, he argued, is whether the results spark a Labour leadership challenge or a cabinet reshuffle that removes Rachel Reeves as Chancellor. Without such a shift, “then the Gilt market will move on”, he said.