The rehabilitation of the UK bond market took another step forward as Prime Minister Andy Burnham's debut budget reassured investors this week, sending yields to a five-week low. Its notable restraint hit the right notes, even as investors agreed that much-needed structural reforms had been pushed down the road for now. The 10-year gilt yield fell as low as 5.25% on Thursday and is set for the biggest monthly drop since May.
"The UK is starting to look like the adult in the room when it comes to fiscal discipline," said Chris Jeffery, chief investment strategist for Legal & General, Britain's largest asset manager. "There may be more tightening needed in future but this budget achieved its aim of maintaining credibility."
The positive reception is a boon for the UK, which still suffers from an image problem with debt investors. That damage was mainly done by the 2016 vote to leave the European Union and former Prime Minister Liz Truss' 2022 mini-budget, which sparked a market rout the Bank of England had to step in to contain. The UK's public finances remain highly precarious, but the country has won plaudits from the International Monetary Fund for its efforts to correct course. Borrowing plans for the rest of the fiscal year ticked up only slightly to £250.6 billion ($334 billion), in line with expectations, and the deficit is projected to fall to 3.4% in 2027-2028.
Burnham has repeatedly stressed his commitment to fiscal responsibility since replacing Keir Starmer in July, a contrast with his earlier remarks that Britain shouldn't be "in hock" to bond markets. Bloomberg Economics estimates the UK's "credibility premium" on the 10-year bond at around 20 basis points, a fifth of the level reached after Truss's mini-budget. Still, long-term questions remain about Burnham's plans to overhaul the economy, with debt at 94% of GDP and costing over £110 billion a year to service.
"The budget will help for now, and in the short-term the UK looks like a relative safe-haven," said John Stopford, a portfolio manager at Ninety One. "Next year's spending review will ultimately be key."
Source: Bloomberg Markets · Summarized by HeadlinesBriefing