Yields on 10-year gilts have risen to their highest level in more than a year, following Chancellor Rachel Reeves’ Autumn Budget yesterday (30 October).
Increased levels of borrowing has meant UK 10-year government bond yields have risen by nine basis points overnight to time of writing (11.45 am, 31 October) as markets digested the prospects of further gilt issuance and an uptick in borrowing to bolster infrastructure spending.
Yields on 10-year gilts have risen by more than 50 basis points since mid-September, during which time Chancellor Reeves announced a technical change to how debt is measured – redefining it as defined as “public sector net financial liabilities” – in order to allow additional government borrowing.
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Chris Arcari, head of capital markets at Hymans Robertson, pointed out that gilt yields initially fell during the first part of the Budget, but that they rose again as soon as during the opposition’s response.
“With the government set to invest an additional £100bn over the next five years as a result of the tweak, we believe they are showing welcome restraint against the £50bn per annum of headroom the changes create,” he pointed out.
“The OBR has raised near-term growth forecasts and, crucially, as a result of increases to investment, has raised the long-term potential growth forecast for the UK.”
Arcari added: “The market will need to recalibrate for materially higher near-term government expenditure and potential rise in business’ labour costs, but we believe the systemic risks to the market are low.”
Garry White, chief investment commentator at Charles Stanley, argued that the rise in gilt yields can also be attributed to uncertainty in the US, with UK gilts and US treasuries continuing to move in lockstep.
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“The Budget has sparked volatility in gilt yields (and will continue to do so), but gilts are very heavily influenced by global government bond moves, and therefore economic data from the US and Europe,” he explained.
“On the day the Budget was delivered, there was a sharp sell-off in the hours following the statement as markets digested the extent of fiscal easing announced by the Chancellor. The Office for Budget Responsibility (OBR) revised the bank and gilt rate upwards by 25 basis points over the forecast period, reflecting expectations of higher rates for longer.
“Furthermore, the anticipated additional £20bn of gilts issuance was skewed more to the long end of the yield curve than markets were anticipating, promoting a greater rise in longer-dated yields, and a steepening of the yield curve.”
White added that rise in the minimum wage could be inflationary, although he pointed out the futures market is still pricing in another 25-basis-point cut from the Bank of England at its November meeting, “so nothing has changed on this front either”.
“Movements in gilts are very heavily influenced by global treasury moves, particularly economic data from the US. Indeed, a lot of recent moves in bond markets can be attributed to uncertainty across the Atlantic ahead of the looming presidential election.”
Russ Mould, investment director at AJ Bell, said an increase in UK government borrowing could mean “interest rates stay higher for longer”, which has been reflected by lacklustre returns from the housebuilders and retailers since the London Stock Exchange opened this morning.
“The idea of rates staying higher for longer was also relevant to the US market after GDP figures pointed to a robust economy. That might encourage the Fed to be less aggressive with rate cuts,” he warned.
However, Mould believes this could spell more of an issue for equities rather than fixed income.
“Many investors were hoping big rate cuts would create another tailwind for equities, particularly tech stocks, so add in a slight setback on this front with a negative response to Meta and Microsoft’s latest figures and you’ve got the potential for a gloomy day [across stockmarkets].”
