UK gilts are lagging behind other sovereign bonds as the referendum on Britain’s membership in the European Union draws closer. The uncertainty surrounding the potential outcome of the vote is weighing on investor sentiment.

Analysts attribute the underperformance to increased risk aversion. A vote to leave the EU could trigger significant economic disruption, impacting the UK’s growth prospects and potentially leading to a downgrade of its sovereign credit rating.

The yield on 10-year gilts has risen in recent weeks, reflecting the increased risk premium demanded by investors. This contrasts with the performance of German Bunds and US Treasuries, which have seen yields decline as investors seek safe-haven assets.

Market participants are closely monitoring opinion polls and political developments for clues about the likely outcome of the referendum. The volatility in gilt prices is expected to persist until the vote takes place and the future direction of the UK economy becomes clearer.

Potential Scenarios and Market Impact

• Remain Vote: A vote to remain in the EU is expected to lead to a relief rally in gilts, as uncertainty diminishes and investors reassess the UK’s economic outlook.
• Leave Vote: A vote to leave could trigger a sharp sell-off in gilts, as investors price in the potential economic consequences of Brexit. The Bank of England may be forced to intervene to stabilize the market.

The long-term impact of Brexit on the gilt market will depend on the terms of the UK’s exit agreement with the EU and the subsequent performance of the UK economy.