Key Moments
- Brown Brothers Harriman flags underperformance in UK gilts and GBP as political scrutiny of Prime Minister Keir Starmer intensifies.
- BBH expects Labour’s weak position and fiscal credibility concerns to continue weighing on UK assets.
- With UK nominal GDP growth running below 10-year gilt yields, BBH anticipates EUR/GBP will move higher in line with rate differentials.
UK Assets Struggle as Political Pressure Mounts
Brown Brothers Harriman’s Elias Haddad notes that UK government bonds and the Pound are lagging as political pressure on Prime Minister Keir Starmer increases. The firm points to a combination of political uncertainty and questions around fiscal policy as key drivers behind the recent underperformance of UK assets.
According to Haddad, Labour’s fragile political standing and ongoing concerns about its fiscal approach are likely to remain a drag on both UK gilts and GBP, supporting a firmer EUR/GBP over time.
Gilts and Sterling Lag Global and Euro Area Peers
BBH observes that UK long-dated government bonds have fallen behind their global counterparts, while the Pound has weakened relative to the Euro.
“Long-term gilts are lagging global peers, while GBP is underperforming EUR. UK Prime Minister Keir Starmer is in the hot seat again after being accused of misleading parliament about whether Peter Mandelson had passed security checks before his appointment as ambassador.”
| Market / Factor | BBH Assessment |
|---|---|
| Long-term UK gilts | Lagging global peers |
| GBP vs EUR | Underperforming EUR |
| EUR/GBP outlook | Expected to grind higher with rate differentials |
| UK nominal GDP vs 10-year gilt yields | Nominal GDP growth tracking below yields |
Starmer’s Leadership Under Scrutiny
The report highlights that the political backdrop surrounding Starmer is becoming more challenging.
“The real test for Starmer’s leadership will be the aftermath of the May 7 local and Scottish elections. Starmer’s Labour Party is poised to get trounced, potentially setting the stage for a leadership challenge. A leadership contest can be triggered if the leader resigns or a challenger secures the backing of at least 20% of Labour MPs.”
“Starmer is the most unpopular British prime minister since records began, even worse than Liz Truss’s 49 days in office. As such, his exit will not be a big shock to financial markets. The surprise would be if he managed to stay on as prime minister. Regardless, with or without Starmer, the governing Labour Party faces an uphill battle to restore fiscal credibility. UK nominal GDP growth is tracking below 10-year gilt yields, making stopping debt growth very difficult. As such, we expect EUR/GBP to grind higher in line with rate differentials.”
Fiscal Credibility and EUR/GBP Outlook
BBH emphasizes that the core issue for markets is the difficulty the UK government faces in rebuilding fiscal credibility. With nominal GDP growth running below 10-year gilt yields, the firm argues that containing debt growth is challenging, reinforcing a cautious stance on UK assets.
In this context, BBH expects EUR/GBP to “grind higher in line with rate differentials,” reflecting both political uncertainties and the unfavorable balance between growth and borrowing costs in the UK.
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