Despite media focus on a recent by-election loss for the governing party, markets remain unfazed. The real catalyst for pricing in a UK political risk premium will be the outcome of the local elections in May. A poor showing then could trigger a leadership challenge, leading to an extended period of uncertainty.
Contrary to concerns about increased debt, potential new EU joint issuance for defense is viewed as a long-term positive. It would sustain the EU's role as an active issuer after 2027, when current programs like NGU are set to expire, preventing a sharp decline in bond supply and maintaining market relevance.
Despite expectations for a March rate cut, the Bank of England (BOE) vote will be tight, with Governor Bailey as the swing voter. A plausible scenario is that the BOE holds rates in March to appease hawkish members but uses its communication to validate market pricing for a cut at the very next meeting in April, keeping easing prospects firmly alive.
The Chancellor's upcoming Spring Statement is expected to be a deliberate non-event with no fiscal policy changes. The key focus for markets is the Debt Management Office's (DMO) issuance plan. A smaller-than-expected reduction in the maturity of new debt could disappoint some market participants, leading to a modest rise in UK bond yields.