LONDON (Reuters) - Political uncertainty in Britain following a shock election result should benefit British gilts and is likely to keep sterling under pressure, Franklin Templeton’s head of European fixed income David Zahn said on Friday.
Zahn, who manages more than 2 billion euros (1.76 billion pounds), holds a long position in British government bonds.
“The election raises the premise that the negotiations for Brexit will not go well and we have some unknowns as far as the political climate in the UK goes,” he said.
“When we don’t know what’s happening, markets get defensive and so gilts should do OK.”
British voters dealt Prime Minister Theresa May a blow in a snap election she had called to strengthen her hand in Brexit talks, leaving her Conservative Party without a parliamentary majority and throwing the country into political turmoil.
Political uncertainty, which can weigh on economic growth, typically benefits government bonds. The yield on Britain’s long-dated gilt was steady in early Friday trade at around 1.03 percent GB10YT=RR.
Zahn said that while sterling GBP= EURGBP= was undervalued, the currency was likely to continue to be driven by politics, and could remain weak.
“Political events over the coming months will be what drives the currency so we do not have a position in the currency at the moment,” he said.
The surprise result sent the pound to eight-week lows against the dollar and its lowest in seven months versus the euro.
Reporting by Dhara Ranasinghe; Editing by Jon Boyle