Global Rates: Energy priced and UK politics drive Bunds and Gilt yields higher

Hi, and welcome to At Any Rate, JPMorgan's global research podcast series, where we take a look at some of the drivers behind the biggest trends and themes across fixed income, currencies and commodity markets. I'm Francis Diamond, head of European rates strategy at JPMorgan, and today I'm joined by my colleague Aditya Chaudhary to discuss Euro area and UK rate markets, giving me some oil prices and this week's political events in the UK. Euro prices have risen, front-end DM rates have sold off, and 10-year bund and 10-year gilt yields have made new highs this week on the combination of factors, with UK politics once again back in the spotlight, with the possibility that Greater Manchester Mayor Andy Burnham could at some point be challenging PM Starmer for the later leadership later this year.

But before we get into the weeds on UK politics and the implications for the UK rate markets, Aditya, front-end Euro area yields have risen, now have 10-year bund yields back above 3.1%, can you outline what's driven bunds this week? Is it just energy markets, or is there a fiscal angle here we should be concerned about? And how do you see 10-year yields evolving over the next few weeks?

Sure, Francis. So yeah, like the DM yields have indeed moved quite a bit higher this week, and with the German yields at least on the margin have been outperforming, because I think most action is, as you said, is coming from UK and also strong data in the US. I believe the sell-off globally, but mostly in Germany, was mostly driven on rising energy prices, with a small beta to the UK political noise, and also we had a heavy supply calendar, so maybe that also weighed on duration during the week.

But net-net, I think, is still energy, which is the big driver. And also after the sell-off this week, Euro rates are now trading in a zone that sits between the straight-up almost limbo and the energy price shock scenario, spike, the extreme scenario we have been playing around in our pieces. And we are now getting closer to the extreme energy shock scenario.

So while the backdrop remains headline driven, and we expect volatility to stay elevated given the market sensitivity to developments around the US-Iran negotiations and the energy flow through the straight-up almost, the pullback has pushed wind yields to the upper end of the recent ranges, improving the tactical risk reward in the duration exposure in the intermediate part of the course. So over the medium term, we continue to stress that intermediate level of yields on the German curve, and maybe mostly across the Euro spectrum, are quite compelling for long-term investors who can tolerate near-term volatility. We find locking 10-year bond yields around the 310 area quite attractive, as we find the risk of a large and sustained sell-off above these levels quite limited, even in extreme scenarios, given our view that fiscal term premia is not a German story, that's a view we have been holding for the past, since pretty much the German fiscal announcement last year.

And also the view that any material repricing higher on ECB tightening expectations, let's say on an energy shock getting even more extreme from these levels, will mostly lead to a significant bear flattening of money market curves, which will keep intermediate level of yields quite range-bound. So net-net, I think our main view has been structurally, the intermediate level of yields are good for long-term investors with some yield appetite. So Francis, that's the story on the Euro side, I think let's move to UK where all the action is.

The UK politics has been in the spotlight this week, with a series of events that had further put pressure on the PM's drama, following the weak performance of Labour at the local elections. Can you summarise what has happened, and what do we expect to happen next from here? Yeah, sure.

So I think to recap the somewhat chaotic political events that followed this week from the local election results the week before, the start of this week saw a flurry of Labour MPs calling on PM Stump to stand down. We saw several junior ministers resign from the government. Then Health Secretary Streeting resigned on Thursday as well, but he did not trigger a leadership contest that many had expected.

And then probably the most interesting twist was we saw on Thursday, late on Thursday, the Labour MP for Makefield, which is a constituency in Manchester, Josh Symons, he announced he was going to step down from his parliamentary seat in anticipation that Andy Burnham, the current mayor of Manchester, would then stand in the subsequent by-election. So I think it's worth recapping, we've probably gone through this before and I think listeners are probably pretty well aware now, but the Labour Party rules state that only Labour MPs can contest the Labour leadership, Burnham, as is well known, is not an MP. So he needs a path to become a member of parliament with a timeline that probably certainly sees, first of all, an upcoming by-election maybe held in mid-June, which he needs to win.

And then if he wants to challenge for prime minister, then he needs to put a leadership challenge up against Starmer and probably might see some other challenges in the mix as well at that point, with any contests likely to take several weeks and probably it's pretty unlikely much is going to be concluded before September at the earliest. So even if Burnham would be cleared to stand in this upcoming by-election, and we still don't have dates exactly for that as we record this on Friday afternoon, it's probably likely his favorite to win, but it's not necessarily a done deal. And I think it's worth pointing out that, yes, reform were in second place to Labour in the 2024 general election with 31% of the votes versus 45% for Labour.

But in the recent local elections, reform actually won 50% of the votes, some sort of 15%, 17% ahead of Labour there. So I think the assumption here is that the kind of the name and the fact this is a Manchester area with Burnham mayor of Greater Manchester would kind of help Labour's chances here. So I think our expectation is overall, probably there's going to be a leadership challenge from Burnham at some point as an MP that Starmer will need to face.

It's probably a reasonably high likelihood in our view that by the end of the year, we could be seeing Burnham as the next prime minister. Okay. And about UK yields, like the yields have sold off this week with the one-year, one-year Sonia is moving around 25 basis point higher, and 10-year yield are now close to 515.

Is this all due to political events or is there something else driving these moves? Well, I do think there's a temptation for some market commentators to explain the sell-off in the UK purely as domestic political story. But I think this is only partly true.

And as you mentioned Aditya, Brent oil prices have risen around about 7% higher on the week. And we've been highlighting quite a bit in our previous research that front-end UK rates have exhibited a very strong stretch to Brent oil prices. And actually, when you look at it in more detail, if you take, for example, sort of the one-year, one-year part of the Sonia curve, the beta versus oil has been higher than the beta of the similar part of the one-year, one-year Euro curve since the start of the Middle East conflict.

And that beta has generally been about 50% higher for the UK against oil at the front-end than it has against Euro rates. So yes, whilst political events this week and the potentially increased probability we have Burnham as a PM by the end of this year have driven some of the relative underperformance versus of UK versus Euro rates at the front-end, we think it's relatively modest. And actually, if you look at the sell-off, we probably think probably five basis points is due to noisy political concerns and the rest of it is really just a beta to energy prices.

So I think the view here is probably we don't expect UK rates to continue to price for the increase of fiscal political uncertainty in the near term. We now have a lengthy process of dual events of a by-election. And then even once we get through that, the likelihood of a leadership contest is still several months away.

Visibility on any potential policy shifts is low. And I think probably the political noise and uncertainty we've seen this week is now kind of in the level of rates and kind of in the markets to a pretty strong degree. Yeah, cross-market, 10-year gilts have underperformed against bunds.

A lot of people look at the 10-year gilt bund spread. It's widened around 13, 14 basis points. It's now over 200 basis points.

But again, if we look at what's driving this, a lot of it is the repricing of front-end SONIA or front-end UK rate expectations versus ECB rate expectations. And actually, when you adjust for those moves and front-end rate expectations, the movement in 10-year gilt bund spread actually looks pretty close to fair value. Probably the one place you can see some degree of increase, let's say, political noise in UK markets on the curve.

So 2's-10's curve, which is part of the curve a lot of people focus on for tracking risk premia or uncertainty premia, that has steepened and probably has steepened more than the moves in both front-end UK rates. And if you look globally at what the 2's-10's dollar curve has done would normally imply. So I think there is some evidence, if you look on the curve, that there's some increased fiscal political uncertainty priced.

But again, it's not massively extreme to what we saw the curve behave in terms of the steepening into last year's autumn budget or ahead of this year's by-election in February. So I think, yes, we can attribute in various complexes some of the moves to increase political risk premia. But as you said at the start, I think the bulk of the repricing in the front-end is really all about energy.

Yeah, makes sense. And finally, what's your view on UK yields going forward? So I think when we look at intermediate yields, over 20 base point higher in the 10-year sector.

Current levels are just above 5.15% to 5.15. Close multi-year highs. I mean, you mentioned the energy scenarios we've looked at.

We're now approaching as well in the UK 10-year rates that are getting pretty close to our energy shock scenario of 5.2. And yes, geopolitical uncertainty remains elevated. There is still risks of a further escalation.

It's still unclear in terms of the outlook on the geopolitical front. And as I've noted, domestic political uncertainty has definitely increased. But I think if you're a long-term investor, 10-year yields in the UK at 5.15 are now starting to look attractive.

In our view, as we said, we don't think the market's going to be pricing an ongoing wave of political fiscal uncertainty continuously over the next several months. And in the event there is a further increase in energy prices, I do think at some point this intermediate part of the curve is going to start to focus not just on the impact of higher energy through a central bank channel of higher rates, but also the impact of what that might mean for growth further down the line. So we do think for longer-term investors, things start to look reasonably attractive in terms of intermediate yields at these sorts of levels.

So thanks Aditya, and thanks for listening. That's all from us. Stay tuned for more updates on the fixed income space here on At Any Rates, JPMorgan's global research podcast series.

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This episode was recorded on 15th of May, 2026.