The UK gilt market experienced a significant rally on Wednesday after Chancellor Rachel Reeves’ budget gained favour with investors. Both Vanguard Group and Royal London Asset Management capitalised on the positive market sentiment, purchasing gilts. The rally was particularly pronounced in longer-dated bonds, marking the largest surge since April. Ales Koutny of Vanguard noted that he had reduced his gilt holdings prior to the budget, anticipating increased volatility. However, Reeves’ statement, which included tax increases and measures to solidify the UK’s fiscal position, prompted him to re-enter the market, buying 30-year bonds. He indicated a potential for further increasing his exposure, viewing current prices as unduly pessimistic.
Koutny commented that while the budget had a limited impact on the UK’s overall fiscal situation, markets were still pricing in excessive risk premiums. This perceived overestimation of risk created an opportunity for investors like Vanguard to capitalise on undervalued assets. Thirty-year gilts, which are particularly sensitive to the financial outlook, led the market’s gains. Their yields fell by 12 basis points, representing the most substantial daily decrease since April, a period marked by trade tariff uncertainties.
The initial market reaction, however, was not without its complexities. Gilts initially fluctuated between gains and losses following an erroneous release of forecasts by the UK’s fiscal watchdog. This occurred before Reeves had officially presented the budget package to Parliament, creating a period of uncertainty before the market stabilised and responded positively to the Chancellor’s announcements.
Vanguard Group is a global investment management company, managing trillions of dollars in assets. Royal London Asset Management is one of the UK’s leading investment firms, managing investments across various asset classes.
