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Investing.com - UBS is maintaining a positive stance on U.K. gilts despite recent volatility, citing several factors that could support the market despite emerging pressures on public finances.
The investment bank in a note on Monday acknowledges that adjustments to the U.K. welfare spending bill have increased pressure on public finances, but believes the most likely resolution will come through tax increases rather than additional borrowing that markets have clearly rejected.
UBS notes that the short-term impact on gilt supply from restoring welfare and winter fuel payments is "very modest" for this year and next, while the Debt Management Office’s shortening of gilt supply should have a more significant market impact.
The bank maintains several recommendations for UK rates, including "6m30y receiver ladders," "long 30y Sonia against USD SOFR," and "5y5y/10y20y flatteners," while also expressing a positive view on 2-year Sonia outright positions.
UBS suggests that lower interest rates could restore a substantial portion of lost fiscal headroom, with their analysis indicating that a 100 basis point reduction in rates could improve headroom by approximately £16 billion through combined effects on gilts and the policy rate.