Bond Giants React to the UK’s Most Anticipated Budget in Years

(Bloomberg) -- As the dust settles on the UK’s most anticipated budget for years, investors are piecing together a picture of what comes next for the gilt market.

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They’re weighing a package that points to substantially steeper government borrowing in the coming years, along with higher-than-expected inflation and growth forecasts.

With many of the major policies already leaked, Chancellor of the Exchequer Rachel Reeves on Wednesday managed to avoid unleashing the sort of chaos that met former prime minister’s Liz Truss’ ill-fated mini budget in 2022.

Still, bonds were whiplashed as investors attempted to make sense of the ramifications and what it all means for monetary policy.

Here’s the reaction from 10 major investors interviewed by Bloomberg News.

Neil Mehta, portfolio manager at RBC BlueBay Asset Management:

“The biggest takeaway is the amount of borrowing is huge, and the growth forecasts are ambitious. In all, it was very well and confidently communicated by Chancellor Reeves. While it’s credible, there isn’t much room for slippage, on growth or borrowing. Could it unleash bond vigilantes? Yes, if Gilt yields remain high, they don’t hit their growth targets and they have to tax more, or borrow more.”

Vivek Paul, UK chief investment strategist at BlackRock Investment Institute:

“The plethora of policies leaked to the media, the foreshadowing of the change to fiscal rules at the IMF meetings and the prominent interaction with the OBR appears to have broadly had the desired effect on markets for now, with the reaction in gilt yields a far cry from the 2022 episode. The relative political stability afforded by the summer’s decisive election result and our view that the Bank of England is likely to cut rates more than markets currently think means we stay overweight UK equities and UK gilts.”

Ranjiv Mann, senior portfolio manager at Allianz Global Investors:

“Overall, the desire for fiscal discipline remains intact given the fiscal stability and investment rules, which should be positive for gilts. From a valuation perspective, the market continues to price a shallower rate cutting cycle in the UK versus other G10 markets. We still prefer gilts both on an outright and cross market basis versus bunds.”

Helen Anthony, portfolio manager at Janus Henderson Investors:

“I don’t think the UK is immune to the growth slowdown that we’re seeing in Europe. We became more positive on gilts over the last week coming into the budget, given how much they sold off prior to that. Near term I would be slightly more cautious given the price action. But as the focus shifts away from budget, and more towards economic data, I think there could be a case made to be in favor of gilts.”

Shamil Gohil, fixed income portfolio manager at Fidelity International:

“The big thing here, and why we’re not getting a big Liz Truss blow-up, is the Office for Budget Responsibility has backed the forecast particularly around growth, which obviously gives the whole budget more credibility. When you have big events like this, the market can ebb and flow until positions are squared, but I think overall we do continue to see some gilt out-performance here.”

Ben Nicholl, fund manager at Royal London Asset Management:

“The growth forecasts look fairly optimistic and the inflation numbers are certainly higher than where the Bank of England has them for the next few years. And given just how many cuts are priced into gilts for next year, if the OBR is forecasting inflation at 2.5%, that is maybe a difficult backdrop for the Bank of England to cut rates materially. Those are two key points that need to be considered as part of this budget.”

David Page, head of macro research at AXA Investment Managers:

“We’ve seen quite a significant increase in spending and investment, and that’s meant that actually you’ve seen quite an increase come through in borrowing as well. It implies that you’re going to see about an extra £120 billion worth of gilt issuance over the next four years. That’s quite a lot for the market to take down.”

Matthew Amis, investment director at abrdn:

“The whole package is a lot more than we expected but not reckless. Gilts have built up a premium over the last few weeks particularly vs bunds. Once the dust settles we think gilts can close that gap, but not fully.

“The market has taken the view that the increase in National Insurance Contributions would be passed to the consumer and therefore inflationary, so priced out BOE cuts. We think the reverse - the UK consumer isn’t in a good place, and we aren’t sure businesses are in a position to pass the tax increases on.”

Ales Koutny, head of international rates at Vanguard:

“This is loosest budget that we’ve had in many, many years. We don’t think this will lead to a massive move from the BOE, but it’s not a dovish signal. We maintain our overweight sterling view. We are comfortable enough now to move to a neutral position on gilts, but we struggle to see why a £40 billion increase on public sector net borrowing and more spending, more growth, more inflation at the margin would translate into an overweight position for gilts.”

Marcus Jennings, fixed income strategist at Schroders:

“The term ‘stability’ was mentioned on multiple occasions throughout Reeves’ speech. That has given the market some comfort, or at least reduced some fears, that things could have been worse on the fiscal side of things.

“Reeves is going reasonably aggressively on the tax increases and that plugs some if not all of the £40 billion funding gap she alluded to ahead of the budget. So on the the surface of it, it’s not like she’s playing fast and loose with the public finances.”

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