UK government bond yields have declined more than 20 basis points from mid-February highs as investors increase their holdings of gilts despite ongoing political turbulence in Westminster. The 10-year gilt yields dropped alongside US Treasury rates, with London-based bond investors surveyed by ING earlier this month reporting they were overweight on UK government bonds. The two-year swap rate, which reflects Bank of England policy expectations, has reached new lows.

The improved sentiment comes as diminishing inflation risks and recurring US equity market volatility related to artificial intelligence make gilts more attractive. The spread between gilt and swap rates is narrowing, indicating healthy demand, whilst risk premium in gilts has disappeared with yields moving closer to ING's long-term fair value estimates. Chancellor Rachel Reeves is scheduled to deliver the Spring Forecast on Tuesday.

Labour's polling has fallen to 18% according to YouGov, down from approximately 35% at the 2024 general election. The party faces challenging local elections on May 7, following this week's by-election in Gorton and Denton. The budget deficit for FY2025 is projected to reach 4.3%, below the OBR's 4.5% forecast and down from 5.1% in the previous year. The deficit is on track to fall to 3.5% this year, with gilt sales expected to decrease to approximately £250 billion from £300 billion in the current fiscal year.