LIVE MARKETS-Go long Gilts into the budget, UBS say

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GO LONG GILTS INTO THE BUDGET, UBS SAY

Four years ago, a British budget sent gilt yields soaring and brought then-Prime Minister Liz Truss' premiership to a sudden halt.

The situation is similar in some ways at the moment, the British finance minister is about to announce a budget and there is plenty of bond market volatility in Europe, though it's firmly on the other side of the English Channel.

And, in even starker contrast with 2022, UBS reckon investors should be buying gilts ahead of next week's budget.

They are recommending traders go long the 10-year gilt, with a target yield of 5.2% from the current 5.36% (5.38% when they announced the trade).

They say policy uncertainty has left a 15-20bps of fiscal-risk premium embedded into gilts throughout this year, which they think the budget will remove.

"Our economists expect modestly higher deficits than in the spring (+0.2%) but ultimately, higher energy prices and interest rates have limited the (Prime Minister Andy) Burnham government's room to manoeuvre around the Autumn Budget," they say.

They only see this as a short-term tactical trade though.

"Inflationary pressures from geopolitical uncertainties will remain the main headwind to UK rates into year-end. Over the longer-term, we continue to see gilt yields trading higher-for-longer with 10-year gilts trading above 5% over the next couple of quarters."

(Alun John)

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