(Bloomberg) -- How do you solve a problem like Jeremy Corbyn? The time has come for investors to hedge against the risk of a Labour government under the leadership of a socialist firebrand.
Nomura International recommends curve-steepening trades on U.K. government bonds as the best way to protect gilt investors from the possibility of more political upheaval in the form of a 68-year-old who wants to raise income taxes, bring back into public ownership rail, water and energy companies and inject 6 billion pounds ($7 billion) into the National Health Service.
The probability of Theresa May stepping down in the next 12 months is at 56 percent, according to a survey of Nomura clients, while the likelihood of Corbyn replacing her as prime minister is 17 percent.
“This is a time of unique political uncertainty in the U.K.,” wrote strategists led by Andy Chaytor in a note. If these survey numbers are “at all indicative of market beliefs it is worth considering the trades for this tail-risk.”
A trade whereby five-year bonds outperform debt maturing in 30 years is a good option in the face of the government collapsing because the front end will benefit from a flight to quality and a pricing out of rate hikes, while the longer end will suffer from increased borrowing and greater supply of gilts in the market, according to the bank.
To contact the reporter on this story: John Ainger in London at jainger@bloomberg.net.
To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Flavia Krause-Jackson, Eddie Buckle
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