Foreign enthusiasm for gilts isn’t just due to a resurgent pound. Rapid vaccine roll-out points to a faster recovery from the Covid-19 pandemic in Britain than elsewhere in Europe. That, coupled with the fact that the Bank of England is generally seen as more aggressive than the European Central Bank, means that UK government debt yields are relatively attractive. “It becomes easier to sell gold with a 0.81% return when people glance at France’s 0.17%,” said Kit Juckes of Société Générale, a bank.
Political risk remains, especially in the form of an imminent fight over Scotland’s future. But the fiscal impact of a Scottish exit on the rest of Britain would be mild and positive. In the 2019-20 tax year, Scotland accounted for 9.2% of Britain’s total government spending and about 8% of tax intake. And some of that revenue was likely to be preserved as financial firms headquartered in Edinburgh moved to London. “Hive Scotland off, and the rest of the” UK assumes a budget deficit of about 2% of GDP to one of about 1.5%,” said Thomas Pugh of Capital Economics, a consulting firm.
Things will not be smooth sailing in the coming months. A row between Westminster and Brussels over the implementation of trade rules in Northern Ireland threatens to reopen arguments that led to the Brexit withdrawal agreement. That would hurt Britain’s trade prospects. Meanwhile, the Treasury Department plans to veto the government’s stock exchange listings for national security reasons, which could diminish the attractiveness of the country’s financial markets to foreign companies. But for now, it looks like the money will keep flowing in. “We are still priced for permanent uselessness of the” UK‘ says Mr. Juckes. “There must be an opportunity there.” ■