The recent surge in long-dated gilt yields suggests significant market anxiety surrounding UK political stability, leading analysts to investigate the existence and magnitude of a perceived 'plonker premium.' While political uncertainty involving the Prime Minister and the risk aversion of City professionals towards left-leaning policies (including Green Party ideas) provide a backdrop, determining the precise impact of domestic politics on bond pricing remains complex.

Market expectations for Bank of England interest rates have climbed sharply; Bloomberg terminal data shows December 2024 rates priced at 4.35 per cent, up from 3.20 per cent in late February. However, this shift is not solely attributable to political malaise. The rise coincides with a 50 per cent oil price shock, driving UK 12-month inflation expectations to 5 per cent—more than double the BoE target.

This heightened inflation outlook, exacerbated by the UK's reliance on natural gas, has caused UK yields to rise more sharply relative to the US. While the long end of the UK yield curve appears steep, it is flatter than its average of the past year. Therefore, the slump in long-dated gilts may reflect global inflation drivers and energy price pass-through more than a pure political risk premium alone, despite observations that the curve has failed to flatten recently while the US curve has done so.

Key Details:

* 4.35 per cent (Expected BoE rate in Dec 2024)

* 50 per cent oil price shock (Coinciding factor)

* 5 per cent (UK 12-month inflation expectation)

* 3.20 per cent (Expected BoE rate in late February)