[MARKET ANALYSIS] Gilts pressured as PM Starmer faces calls to resign, BoE ahead

• Gilts are underperforming this morning, currently lower by around 40 ticks. Initially gapped lower by around 19 ticks, and then extended lower to make a trough of 90.13. Since, UK paper has scaled back some of those earlier losses in-fitting with a broader pick-up across global fixed income. From a yield perspective, the 2y-10y yield curve steepened to the most since 2018.
• The underperformance in Gilts today can be attributed to the increased pressure that PM Starmer is facing for his decision to appoint Lord Peter Mandelson as the US ambassador, despite knowing about his links to Epstein. As it stands, several MPs are calling for Starmer to resign whilst others are calling for the sacking of Chief of Staff McSweeney; MP Turner said if he does not sack him, then his own back will be “up against the wall… soon” – nonetheless, the did suggest that there is still support for the PM adding that MPs do not want him to go. As it stands, Polymarket odds of Starmer to be out the door by June 30th have risen to 47% (vs 23% yesterday).
• Now focus turns to the BoE later. In brief, the Bank is expected to keep rates steady at 3.75% though there are some mixed views on the vote split; some see 7-2, whilst others see a slightly more dovish outcome of 6-3. This is an MPR meeting, so updates to the Bank’s projections are expected and BoE’s Bailey will then appear at the post-policy presser thereafter.

Gilts are facing pressure due to political instability surrounding PM Starmer, with growing calls for his resignation impacting market sentiment. This backdrop sets the stage for the Bank of England's decision later today, where any dovish signals could further influence the performance of UK bonds as traders reassess their outlook ahead of the meeting. Given the current volatility, watch for potential shifts in yield curves based on both the political landscape and BoE guidance.