Gilt‑Market 101: What the US–ish U‑Turn Means for Your Bonds
Think of the gilt market as a picky foodie. If the government starts serving up excess borrowing with a side of sloppy fiscal policy, the market will politely say, “No thanks.” That’s exactly what happened last week: a sudden crisis (the blowout) served as a stern reminder that the market won’t tolerate a budget that overreaches.
Why the U‑Turn Feels Like a Fiscal Fumble
The UK’s policy roller coaster has taken a few sharp turns:
- Winter fuel cut reversal – the government pulled back on cutting the fuel bill, bleeding some of the fiscal headroom.
- Welfare reforms undoing – a plan to trim welfare spending was reversed, adding extra weight to the budget.
- Every move reduces the margin the government has to wiggle, and the gilt market feels the squeeze.
Economic Forecast: A “Nudgy” Next Step
Experts say the latest policy moves are signalling a tighter budget spell. When the Eat‑Down (fiscal tightening) hits the growth engines, the UK could drive into negative growth territory, which is a red flag for the Bank of England (BoE).
And what does the BoE do when a recession sneaks in? Cut rates harder and faster. That means interest rates could drop more aggressively than usual, which is actually a win for investors trying to chase gilt yields.
Voices from the Market
Oliver Faizallah, Head of Fixed Income Research at Charles Stanley, paints a quick picture:
“The gilt market won’t take this excess borrowing – it’s a hard lesson that makes the current fiscal rules even clearer.”
- “The welfare and winter fuel cut U‑Turn are real. Fiscal headroom is drained, and we’re not looking to unwind that.”
- “Spending cuts and tightening will hurt the UK’s growth. We’ll see a slump or a recession, which may shake the BoE into raising its rate‑cut tempo.”
- “For the next 12 months, that means the gilt market could see a more favourable environment for bonds as the BoE swoops in to lower rates.”
“Meanwhile, we anticipate an uncertainty surge in the UK gilt market – the long‑term yields stay high. Anything that pushes up issuance or loosens the fiscal rope won’t sit well with investors.”
My Take: Keep Your Eyes on the Autumn Budget
Get ready for the Autumn Budget – it’s likely to bring updated taxes and spending adjustments. The gilt market might stay in a cautious mood, but know that a BoE tactic to cut rates could help gilt yields look a bit brighter down the road.
Bottom line: the market’s telling you – keep a lookout for fiscal tightening, tweak your bond strategy accordingly, and enjoy the (hopefully) breezier interest‑rate scene that follows.
