BNY’s Geoff Yu highlights that shifting patterns in gilt ownership are mitigating downside risks for the British Pound (GBP) even as fiscal risks in the United Kingdom increase [1]. According to Yu, foreign investors have already reduced their exposure to UK gilts, resulting in domestic buyers becoming the dominant holders [1]. This change in ownership structure is significant as it limits the potential for sharp currency moves in response to fiscal developments.
The article notes that markets are currently pricing in policy uncertainty following local elections, with most scenarios suggesting a stronger fiscal impulse from the government [1]. Despite the prospect of fiscal loosening, BNY does not anticipate a repeat of the 2022 minibudget shock for the GBP, suggesting that any downside for the currency may be more contained this time around [1].
Yu points out that aggregate demand for gilts is at its highest levels in years, even as cross-border investors have sold gilts at multi-year highs [1]. This dynamic implies that if the UK needs to increase fiscal risk by issuing more gilts in the coming months, cross-border institutional investors are unlikely to have the capacity to absorb significant additional supply [1].
Overall, the analysis suggests that while fiscal risks remain, the current ownership structure of the gilt market and strong domestic demand are providing a buffer for the GBP, reducing the likelihood of severe market disruptions similar to those seen in 2022 [1].
CONCLUSION
BNY’s analysis indicates that domestic demand for gilts is cushioning the Pound against rising UK fiscal risks. While policy uncertainty and potential fiscal loosening are being priced in, the risk of a repeat of the 2022 minibudget shock appears limited due to reduced foreign ownership and robust local demand.