On Wednesday, borrowing costs in the UK increased, reversing the initial positive market response to the Labour government’s first Budget. This shift was sparked by investor concerns over unexpectedly high bond sales to support government spending plans.
The yield on the 10-year gilt rose by 0.05 percentage points to reach 4.37 percent, the highest level in five months, while the two-year yield increased by 0.08 percentage points to 4.34 percent.
Initially, yields decreased as Rachel Reeves delivered her speech, wherein she pledged to improve the UK’s public finances and eliminate the government’s day-to-day spending deficit within three years, earlier than anticipated. However, market sentiment shifted after the Treasury released new figures alongside the Budget, indicating debt sales of £300 billion for the current fiscal year, surpassing the previous estimate of £278 billion and slightly exceeding investor expectations.
Jim McCormick from Citi described the Budget as “gilt-negative.” He noted that its initial market impact was mitigated by the government’s prior indications of plans to ease fiscal rules and increase borrowing. Without this prior signaling, the response might have been more negative, especially given unexpected elements such as the level of NHS spending.
Andrew Pease, Russell Investments’ chief investment strategist, noted that significant increases in government spending and a slower anticipated decline in public sector borrowing were unfavorable for gilt investors.
Labour’s initial Budget was seen as a test of investors’ willingness to finance its ambitious investment plans without triggering a sell-off akin to the reaction to Liz Truss’s controversial 2020 mini-Budget. Prior to Wednesday’s announcement, the government had indicated a relaxation of fiscal rules to accommodate additional borrowing.
This change contributed to investor unease regarding the volume of gilt issuance in the upcoming years, leading to a recent sell-off that pushed 10-year yields from approximately 3.75 percent in mid-September upwards.
In contrast, small and mid-cap UK equities, particularly energy companies, performed better than gilts following less severe tax changes for oil and gas stocks than anticipated. The FTSE 250 index increased by as much as 1.7 percent during Reeves’ speech, marking its largest one-day gain since July, before scaling back to a 0.5 percent rise.
Laura Foll, a portfolio manager at Janus Henderson, remarked on the Budget’s impact, stating that it provided needed certainty for the market, emphasizing that certainty and clarity are paramount for investors.