With the mini-Budget disaster still fresh, and given that the UK is being beholden to financial markets due to its structural twin deficits, the market has been on high alert. In our view, rising gilt yields over the past month have been primarily driven by robust economic data in both the UK and the US, alongside bets on a reflationary Trump presidency. More gilt issuance than previously expected looks to have only nudged yields. At the time of writing, the yield on the 10y Gilt is up 6bp on the day to 4.37%, in line with the broader market movement. Yet today’s volatility in the UK bond market does underscore the need to tread carefully.
In fact, the previous government was already gaming the fiscal rules and this didn’t spark any concerns in markets. We don’t see how tweaking the fiscal rules to allow for more much-needed investment would ‘spook’ markets. That’s also clear in sterling’s steady rise vis-à-vis the euro. We’ll get worried if gilts seriously underperform US Treasuries alongside a weak pound something that is not happening right now.
We think the Bank of England will argue that this Budget has little net effect on the medium-term demand-supply balance. They don't want to be seen to 'thwart' public investment, and with the Bank already on a path of gradual easing compared to the Fed or the ECB, the money markets are relatively stable. There is no need to unnecessarily complicate that picture. - Rabobank
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