Some big investors are betting that UK Chancellor John Healey will stick to fiscal discipline in his first budget, setting off a gilts rally. M&G Plc, Ninety One Plc, Mediolanum International Funds Ltd and Raymond James Wealth Management have bought government bonds ahead of the Oct. 28 event, positioning for a potential drop in yields if Healey can demonstrate a steady hand on spending and borrowing. With 30-year yields at 5.8%, and the UK paying more than its peers to borrow, the task before Healey is to lay out Prime Minister Andy Burnham’s policies on taxation and spending while staying within the fiscal guardrails and avoiding the kind of creative accounting that would anger bond markets.
According to strategists at UBS Group AG, the yield on 10-year gilts could fall by up to 20 basis points, or 0.2 percentage points, if the budget goes smoothly. Jason Borbora-Sheen, portfolio manager at Ninety One, has added to holdings of longer-dated gilts this year with the market having already “been through the fire” and the new government having displayed “some degree of orthodoxy or concern for how gilts react to policymaking.” Britain has spent years paying a price in bond markets after former Prime Minister Liz Truss introduced large, deficit-financed tax cuts as part of a raft of new policies in a 2022 “mini-budget.” The resulting market turmoil was so severe that she abandoned most of the initiatives, fired her chancellor and resigned after just 44 days in office.
Since then, investors have reacted to any signs of fiscal profligacy by pushing bond yields higher. And recent chancellors, keen to keep borrowing costs as low as possible, have tried to convince markets that they will stick to fiscal rules that say the government can only borrow to invest and net financial debt must be falling over a three-year rolling forecast. Those guardrails put clear limits on how much the government can borrow and how large its debt pile can become, according to Chris Jeffery, head of macro strategy at Legal & General Group Plc. That discipline “frankly doesn’t exist in the US,” and the rules are much fuzzier in parts of Europe, he said.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing