/STIR: Citi On The Election Backdrop & Potential Impact On Gilts/SONIA

Citi believe that “the UK election looks a non-event for gilts, but there are tail risks should the incoming government look to create fiscal space (e.g. transferring QT losses and seigniorage income back to the BoE or reserve tiering) or find ways to encourage gilt ownership (via regulatory changes on banks/insurers).”

• “Regardless, UK banks are already showing improving appetite for gilts with April seeing the largest monthly buying from that cohort since February 2021, likely driven by a rebound from the large redemption-related outflow in March.”
• “There was overseas selling of gilts in April, but a benign election may boost flows going forwards, especially to escape the uncertainty of the US election.”
• “Another way the election may indirectly boost demand for gilts is by marking the start of concerted fiscal consolidation which likely boosts rate-cutting potential for the BoE (and ultimately creates fiscal space in doing so). As such, we expect the election outcome, with time, to boost our long-held SONIA Z4/Z5 flattener.”