(Bloomberg) -- UK bonds, the securities at the heart of a recent market turmoil, will rally and outperform US and German sovereign debt owing to a worsening growth outlook, according to UBS Group AG.

The government’s fiscal belt-tightening to restore credibility with financial markets will reduce the need for Bank of England rate hikes, said strategists Rohan Khanna and Jess Eagel. The risk is this new government direction veers “a bit too far into austerity,” pushing the economy into a deeper recession, they said. The analysts are targeting 10- and 30-year gilt yields falling to between 3% to 3.25%, from around 4.00% and 4.25% respectively. 

“This structural narrative of tighter monetary and fiscal policy should be a much stronger driver of long-end Gilts -- conventional and linkers -- than quantitative tightening or supply concerns,” they said in a note to clients. “While the latter factors are not trivial in their own right and could slow down the progress, we don’t think they can overpower the negative impact of a charged fiscal and monetary tightening cycle on the economic outlook.”

Read more: BlueBay Cuts Short Bet on UK Debt as Bears Begin to Retreat

A disorderly selloff in UK bonds was sparked by Prime Minister Liz Truss’s spending plans and exacerbated by forced selling from liability-driven investors such as pension funds. They have since recovered some ground on new Chancellor of the Exchequer Jeremy Hunt’s fiscal U-turns. A number of hedge funds are starting to come around to the idea that it may be time to buy the beaten-up pound and gilts.

UK bonds were mixed Wednesday, with longer maturities rising on their planned exclusion from the BOE’s sales program. Data showed soaring food prices drove UK inflation back into double digits in September, with short- and medium-maturity gilts falling. 

Read more: BOE Focuses on Inflation Fight With Bond Sales in Two Weeks 

©2022 Bloomberg L.P.