Global Macro Chart of the Day "(#128): UK's fiscal risk premium" Kapteyn

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Global Macro Chart of the Day "(#128): UK's fiscal risk premium" Kapteyn

Global Research

21 July 2026ab

Global Macro Chart of the Day Economics

Global(#128): UK's fiscal risk premium

Arend Kapteyn

Economist

Domestic policy uncertainty has added 20bp to UK gilt yields since February arend.kapteyn@ubs.com

+44-20-7567 0531

Following yesterday's cabinet announcements in the UK, attention now turns to

potential fiscal policy changes; the first announcements, e.g. a VAT cut on household

electricity bills, are already emerging. We believe Burnham's earlier comments about

complying with the current fiscal rules have capped the upside on UK gilts, and if the

Autumn Budget complies with the fiscal rules, we estimate gilt yields could rally by at

least 20bp. If the rules are changed, however, the risk premium could rise materially. For

context, we estimate that fiscal concerns added around 75-90bp of risk premium to gilts

in 2022, though that move was exacerbated by pressure on the LDI industry.

To derive these estimates, we first calculate the term premium embedded in 10y gilt

yields—the excess return investors require to hold long-dated bonds rather than rolling

short-dated debt—using the Adrian, Crump and Moench (2013) methodology. This

points to a roughly 130bp rise in term premium over the past two years, but only around

14bp YTD. We then isolate the global component by regressing UK term premium

against US and German term premia, attributing the residual to domestic factors. That

calculation implies a roughly 20bp rise in domestic risk premium since Peter Mandelson's

resignation in early February, which triggered the political transition and lifted policy

uncertainty. While all-in 10y yields have risen by more than that, the move also reflects a