Autumn Budget 2024: UK government bonds volatile as FTSE 100 dips

UK government bonds saw a volatile day of trading as Rachel Reeves delivered her first Budget.

Gilt yields, which measure the cost of government borrowing, have been closely watched by economists over the past few weeks for any indication of market nerves ahead of the Budget.

The yield on the benchmark 10-year gilt closed at 4.31 per cent on Tuesday, its highest level since the general election. The spread against the 10-year German bund, which reflects the perceived riskiness of UK debt relative to peers, hit its widest level since August last year.

Peder Beck-Friis, an economist at Pimco, said traders built in a risk premium on UK debt ahead of the Budget.

The picture on the day of the Budget itself was mixed. Yields edged to as low as 4.20 per cent before the Chancellor’s speech, before rapidly reaching 4.42 per cent around 3pm.

However, the yield on the 10-year gilt ended the day at 4.36 per cent, only four basis points higher than at the start of the day. Yields and prices move inversely.

“Today’s Budget was in many ways highly telegraphed, meaning bond markets had priced in much of the potential impacts,” said Hal Cook, senior investment analyst at Hargreaves Lansdown.

Lindsay James, investment strategist at Quilter Investors, said the financial market reaction would “delight the Chancellor”.

“There were fears that stock and bond markets would not react favourably to the announcements today and the loosening of fiscal rules,” she added.

Kathleen Brooks, research director at XTB, said: “We could traders see ‘sell the rumour and the buy the fact’ in the UK Gilt market, once the uncertainty of the Budget is out of the way.”

Sanjay Raja, chief UK economist at Deutsche Bank, said “markets will have to grapple with higher borrowing”.

Chancellor Rachel Reeves has confirmed that she will reform the fiscal rules to allow greater scope for borrowing, which is forecast to rise by nearly £30bn per year by the end of the decade to fund an increase in investment spending.

But more borrowing would also push the UK’s gilt issuance ever higher. The Debt Management Office said on Wednesday that it will issue £297bn of government bonds in the 2024-25 fiscal year – the second-highest figure on record.

Brooks noted that it was a “huge amount of money” and could explain the “trepidation” in markets ahead of the Budget.

“For now, markets remain broadly sanguine on the Chancellor’s plans,” Raja said. “But today’s Budget signals a lot more gilt issuance to come, relative to previous expectations.”

The FTSE 100, meanwhile, was trading 0.55 per cent lower after Reeves’ speech, although it was separately weighed down by a weak set of results from GSK.

The pharmaceutical giant’s shares were down 2.8 per cent after it reported that vaccine sales had fallen further than expected.

The mid-cap FTSE 250, which is more aligned with the health of the UK economy, jumped immediately after Reeves’ statement before paring some gains later in the afternoon. It is currently up 0.41 per cent.

Investors were paying particularly close attention to any changes to tax reliefs on shares held in the AIM index, with some analysts warning that changes could spark a mass sell-off in London’s junior market.

Reeves has partially abolished the inheritance tax break for AIM, as only a 50 per cent relief from inheritance tax will be applied to its shares, setting the effective tax rate at 20 per cent.

The AIM 100 index surged 4.15 per cent after the Budget.