UK government bonds recovered slightly in early trade while the FTSE 100 edged lower as investors braced for the new government’s 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 hit 4.31 per cent yesterday, its highest closing level since June. The spread against the 10-year bund, which reflects the perceived riskiness of UK debt relative to peers, hit its widest level since August last year.
Peder Beck-Friis, economist at Pimco, said traders have built in a risk premium on UK debt ahead of the Budget.
However, in early trade today gilt yields edged lower, with the yield on the 10-year gilt hovering around 4.27 per cent. Yields and prices move inversely.
Kathleen Brooks, research director at XTB, said it could be a sign that the bond market will “welcome the fiscal shake up“.
“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,” she said.
Deutsche Bank’s Jim Reid said the “main focus” for markets would be on the extent of additional borrowing, particularly given the experience of the mini-Budget back in 2022.
“It was just over two years ago that the mini-budget under Liz Truss sent UK markets into turmoil,” Reid said.
Chancellor Rachel Reeves has confirmed that she will reform the fiscal rules to allow greater scope for borrowing. This would help fund a likely £20bn increase in investment spending over the course of the parliament.
But it would also push the UK’s gilt issuance ever higher. According to the Financial Times, investment banks expect gilt issuance to reach around £300bn this 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.
The FTSE 100, meanwhile, was trading 0.35 per cent lower in early trade, although this was largely due to a poor set of results from GSK.
Shares in the pharmaceutical giant were down 3.6 per cent after it reported that vaccine sales had fallen further than expected.
The midcap FTSE 250, which is more aligned with the health of the domestic economy, was broadly flat.
Investors will be paying particularly close attention to any changes to tax reliefs on shares held in the AIM index. Some analysts have warned that changes could spark a mass sell-off in London’s junior market.