Gilt Yields Rise, Sterling Falls as Concerns Over Budget Resurface

By Renae Dyer

Yields on U.K. government bonds, known as gilts, rose from low levels, while sterling eased as investors turned their focus to concerns about backloaded tax hikes in Wednesday's U.K. budget.

U.K. treasury chief Rachel Reeves announced a series of tax increases that were expected to raise 26 billion pounds ($34.43 billion) to meet her self-imposed fiscal rules. Her budget increased the fiscal headroom to almost 22 billion pounds from 9.9 billion pounds at the previous statement in March.

Sterling rallied and gilt yields fell initially after the announcement as investors welcomed the increased fiscal headroom and the fact the budget contained no major surprises. However, sterling pulled back and gilt yields turned higher on Thursday as worries emerged over the fact that spending will increase in the near term, while many of the tax raises will take effect much later.

"The Chancellor [Reeves] built a bigger fiscal buffer against future shocks, but the composition and back-loaded nature of future tightening suggest it may be built on shaky foundations," BNP Paribas economist Dani Stoilova said in a note.

The yield on 10-year gilts rose 4 basis points to 4.461% on Thursday, having fallen to a two-week low of 4.414% after Wednesday's budget. Sterling fell to $1.3223 against the dollar and 0.8758 per euro Thursday, having earlier reached one-month highs of $1.3268 and 0.8741 per euro, respectively, LSEG data showed.

Analysts expect investors will continue to demand a risk premium in U.K. government bonds and sterling, even though most expect gilt yields to fall over the coming months.

"Questions may arise over whether these measures will be delivered, given they bite toward the end of [the Labour government's run]," Invesco's Mark McDonnell said.

The U.K. budget included inflation-lowering measures such as the freeze on fuel duty and lower household energy bills, which could encourage the Bank of England to deliver more interest-rate cuts.

"The outlook is for further rate cuts over the medium term as growth slows and inflation falls," Societe Generale foreign-exchange strategist Kit Juckes said. "That is all the truer given the admission of weaker productivity growth persisting."

The prospect of more rate cuts and long-term commitments to deliver reduced borrowing over the long run could push both sterling and gilt yields lower over the medium term, he said.

U.K. money markets priced in a 93% chance of a 25 basis-point rate cut at the BOE's Dec. 18 meeting compared with about 85% before the budget, LSEG data showed. Market pricing for next year was little changed, however, with 62 basis points of cuts priced by the end of 2026.

Despite some concerns, investors are broadly positive about the budget's outcome. The cost of insuring U.K. sovereign debt against default using credit default swaps fell as a result to 19 basis points from 20 basis points prior to the budget.

Write to Renae Dyer at renae.dyer@wsj.com

(END) Dow Jones Newswires

November 27, 2025 06:11 ET (11:11 GMT)