UK government borrowing costs could fall if Andy Burnham sticks to Labour's fiscal rules when he becomes Prime Minister, according to UBS.
The bank said there was around 20 basis points of "political risk" still priced into 10-year gilts, meaning investors were still demanding an additional "risk premium" because of uncertainty over fiscal policy, ahead of Burnham's expected confirmation as Labour leader this Friday, meaning he can confirm his Cabinet and move into Number 10.
If the Autumn Budget complies with the existing fiscal rules, UBS believes 10-year gilt yields have "room to rally by at least 20bps". A rally in bonds sends yields lower, in other words lowering government bond costs.
UBS said markets were "waiting for more clarity on fiscal policy", including who will be the new Chancellor, but argued they were "not pricing in any material change in the fiscal rules".
By comparison, the Swiss bank estimated that 75-90 basis points of fiscal risk premium was priced into gilts following the 2022 mini-budget.
UBS said Burnham's public commitment to the fiscal rules had helped "cap the upside to yields", although it warned that any retreat from those commitments would quickly be reflected in higher borrowing costs.
While the bank's economists expected the new government to explore flexibility within the existing framework, they did not expect a material rewriting of the rules.
