UK bonds experienced a significant rally on Wednesday as investors responded positively to Finance Minister Rachel Reeves’ budget. The surge in demand for long-dated UK bonds pushed yields down by the most since April, while the pound also strengthened. Reeves’ budget, which included tax increases for workers, pension savers, and investors, aims to create more fiscal headroom for meeting borrowing targets, a key concern for investors.
The Office for Budget Responsibility (OBR) reported that the government’s headroom now stands at almost £22 billion in five years’ time, exceeding the £17 billion expected in a Reuters poll. The rally in bond prices accelerated throughout the afternoon, partly due to expectations of reduced longer-dated debt sales following the Debt Management Office’s cancellation of planned auctions. Thirty-year gilt yields fell by 11 basis points to 5.215%, marking their largest one-day drop since mid-April.
Sterling rose by 0.5% to $1.32295, bringing its gains over the last week to 1.325%, the highest since August. Several banks, including Nomura and Mizuho, adjusted their trading recommendations for sterling and gilts based on the budget. JPMorgan’s chairman and CEO, Jamie Dimon, praised Reeves’ focus on growth-oriented measures. The FTSE 100 also benefited, rising nearly 1% on the day.
While investors largely welcomed the budget, some economists cautioned about the potential impact of the tax hikes on long-term growth. Kallum Pickering, chief economist at Peel Hunt, expressed concerns about the backloaded nature of the projected surplus, questioning the market’s confidence in the OBR’s forecasts. Despite these concerns, the overall market reaction suggests a positive outlook on the UK’s fiscal direction following the budget announcement.
