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UK government bond yields steadied on Monday following a sharp sell-off driven by investor concerns over chancellor Rachel Reeves’ decision to ditch income tax rises in next week’s Budget.
The 10-year yield fell 0.02 percentage points to 4.55 per cent, remaining close to its highest levels in a month. Yields move inversely to prices.
The market on Friday suffered its worst one-day fall since July — with the yield jumping 0.14 percentage points — as bond investors reacted to the government’s U-turn on its plans to raise income tax in the Budget on November 26.
Reeves and Prime Minister Sir Keir Starmer last week decided to rip up their tax plans for the Budget, fuelling investor fears that the government was unable to take tough fiscal decisions.
Monday’s gilt moves were in step with other big bond markets including German Bunds and US Treasuries. The pound was largely unchanged against the dollar at $1.317.
“The near-term fate of the gilt market is now very much in the hands of Reeves,” said Ben Nicholl, a senior fund manager at Royal London Asset Management.
If Reeves can “stick to the fiscal rules, cover the fiscal black hole credibly, show that debt is on a sustainable downward trajectory, and enact policies that bring down inflation, then gilts could have a strong finish to the year”, Nicholl said. “If not, then gilts could be in for a rocky ride.”
The return of calm to the market comes as the head of one of the world’s biggest and oldest macro hedge funds said that, if Reeves can end uncertainty over any future tax rises after the Budget, then UK borrowing costs could fall closer to those of other major economies.
“I stand by my optimistic view — the Budget will land in a decent place and the scene will be set for a better 2026,” Andrew Law, chief executive of Caxton Associates, told the Financial Times, adding that there was a “mispricing” in UK yields.
Gilts can move to a position of “calm and offering healthy relative yields to other global markets” if Reeves’ tax rises later this month do not hurt growth or drive up inflation, he added.
The blue-chip FTSE 100 stock index dipped 0.2 per cent, after falling 1.1 per cent on Friday as part of a broader stock market sell-off.
Gilt market anxiety was stoked before the tax U-turn last week by a bungled Downing Street briefing that sought to head off speculation about a leadership challenge to Starmer but instead heightened it.
Martin Harvey, fixed income portfolio manager at Wellington Management, said the episode had raised “additional questions for the bond market because it highlights the political challenges associated with fiscal consolidation”.
“Even if the Budget at the end of November is deemed a success, the gilt market will continue to be sceptical about long-term sustainability and risk premia will remain relatively high,” Harvey added.
