BlackRock Inc (NYSE:BLK), one of the largest global asset managers, has warned investors about the potential risk of politicians promising increased spending to win the upcoming election, which could trigger a backlash in the bond market.
In 2022, unfunded tax cuts disrupted financial markets, leading to the resignation of then Prime Minister Liz Truss and intervention by the Bank of England.
The concept of ‘bond vigilantes’, investors who sell bonds in protest against policies they deem inflationary, gained prominence that year.
BlackRock UK chief investment strategist Vivek Paul warned that both of the major UK political parties will propose policies that could unsettle investors as the election approaches, according to a report by Bloomberg.
The BlackRock executive predicted that politicians will be more inclined to promise looser fiscal policy, increasing the likelihood of the return of bond vigilantes.
BlackRock shifted its tactical gilt recommendation on UK government bonds from 'overweight' to 'neutral' in December.
Gilts have rallied in recent months as investors anticipate Bank of England interest rate cuts in 2024.
This marks a shift from a sell-off that began in mid-2022, in which billions of pounds have been wiped from the market value of gilt and inflation-linked gilt indexes.
Chancellor of the Exchequer Jeremy Hunt has hinted that falling interest on debt could provide enough financial headroom for tax cuts in the spring budget, ahead of a general election that is due to take place by January 2025.
Labour leader Keir Starmer has not denied considering tax cuts but has indicated that his priority would be to grow the economy first, vowing he would not damage the economy with unfunded tax cuts.
The Labour Party is considering spending US$28 billion a year on renewable energy and climate initiatives, which is expected to lead to higher borrowing costs.