Gilt Yields Ease, Sterling Falls Slightly in Muted Reaction to U.K. Budget — Update

By Renae Dyer and Miriam Mukuru

Yields on U.K. government bonds, or gilts, fell while sterling remained slightly lower after U.K. Treasury chief John Healey delivered a moderate budget without any big surprises.

In his and Prime Minister Andy Burnham's first budget, Healey repeated his commitment to the fiscal rules and to keep the Labour government's manifesto pledge not to raise income taxes.

Ten-year gilt yields fell 2.1 basis points to 5.321%, according to Tradeweb. Sterling was 0.1% lower at $1.3291 against the dollar and dropped 0.2% versus the euro to 0.8374 per euro, little changed from levels before the budget.

"Sterling and gilts' muted response suggests that the budget broadly met expectations, reassuring investors without materially changing Britain's outlook," eToro analyst Lale Akoner said.

Healey said the Office for Budget Responsibility estimated the fiscal headroom was 15 billion pounds ($19.96 billion) for fiscal year 2029-30, as expected by many analysts but below the 24 billion pounds forecast in March. This headroom--the amount that the government can increase spending or lower taxes without breaking its own fiscal rules--will rise to 22 billion pounds in the fiscal year 2030-31.

Keeping the fiscal rules intact helps contain the reaction in gilts and sterling, although the smaller fiscal cushion leaves less room for shocks, Akoner said.

The budget was in line with the cautious approach investors had anticipated.

"With limited fiscal headroom and little political room for maneuver, most key measures had been trailed in advance," Validus Risk Management global capital markets analyst Harry Woolman said in a note.

Among the measures announced were household relief from soaring energy bills, extra taxes on banks and gambling, a new tax-free savings account for first-time home buyers and lower threshold for business asset disposal relief in capital gains tax.

Healey acknowledged rising borrowing costs and the OBR forecast an extra 14 billion pounds in interest payments on debt this year.

"That is money spent servicing the past rather than investing in the future, and it explains why [Healey] had so little room to maneuver," Woolman said.

In an announcement after the budget, the U.K. Debt Management Office said the net financing requirement was forecast to be 258.6 billion pounds ($344.1 billion) in 2026-27, up by 7.4 billion pounds from April's estimate of 251.2 billion pounds.

U.K. borrowing costs remain at elevated levels and the budget isn't expected to change expectations that the Bank of England is set to raise interest rates in the coming months, starting in November, to tackle high inflation.

Ten-year gilt yields hit a 19-year high of 5.527% in early October, according to LSEG data, as geopolitical tensions in the Middle East and mounting inflation concerns weighed on global sovereign bonds.

Sterling has performed relatively well recently on expectations for fiscal discipline along with rate-hike bets. A weaker euro due to concerns about French debt has provided additional support.

"From here, we believe that inflation and Bank of England expectations are likely to matter more for the pound and borrowing costs," eToro's Akoner said.

Write to Renae Dyer at renae.dyer@wsj.com and Miriam Mukuru at miriam.mukuru@wsj.com

(END) Dow Jones Newswires

October 28, 2026 11:26 ET (15:26 GMT)