Gilts Stabilize After Reeves' Tax U-Turn Sell-Off

Bloomberg Opinion Columnist Marcus Ashworth discusses the gilt market's sell-off after reports that UK Chancellor of the Exchequer Rachel Reeves is doing a U-turn on plans to hike income taxes.

Royal London Asset Management bought UK government bonds during Friday’s market selloff, anticipating that tax hikes in this month’s budget will weigh on economic growth and bolster the case for interest-rate cuts.

The bet is based on a view that Chancellor Rachel Reeves will announce tough steps on Nov. 26 to keep the nation’s finances in order, according to Craig Inches, head of rates and cash at the £181 billion ($238 billion) asset manager. That would mean the government wouldn’t need to tap the bond market for additional debt, he said.

“They can’t borrow more,” he said. “Last week’s market reaction has shown that Reeves will need to continue to heap significant stealth and wealth taxes on the private sector.”

Gilts recovered some ground on Monday after tumbling Friday following reports that Reeves dropped a plan to raise income taxes in her budget. The policy flip flop has lost the government some credibility among investors, leaving the market split between those worried about fiscal risks and those betting rate cuts in coming months will fuel renewed gains.

Royal London had pared an overweight position in long-end and seven-year gilts in recent weeks, but was on the lookout for an opportunity to add back exposure. Inches sees UK interest rates falling by as much as a percentage point to 3%, or to 3.25%, with yields on 30-year bonds potentially sliding a similar amount to 4.5%.

The Royal London UK Government Bond Fund has returned 3.7% year-to-date, putting it in the top 40% of peers, with its performance having weakened during this month’s global bond market selloff. Gilts have suffered more than most, a turnaround after their best performance in almost two years in October.

The gilt market is voting with its feet again after reports that UK Chancellor of the Exchequer Rachel Reeves will do a major U-turn on her plans to hike income taxes in this month’s budget.

The Labour government’s latest embarrassing volte-face is being presented as the result of a nice surprise from Britain’s Office for Budget Responsibility, which had warned of a big budget hole caused by the UK’s ailing productivity. The hole will be slightly less gaping, apparently, so cue the celebrations. This is almost certainly bogus and the bond market can see straight through it.

Reeves has spent the past couple of weeks laying the groundwork for what looked like inevitable tax increases, which would have burnt to the ground her and Prime Minister Keir Starmer’s election-manifesto promise to not squeeze more revenue out of working people. As Labour officials spoke to their lawmakers this week about a different government disaster — its cack-handed management of a minor coup threat against the PM — it became apparent that they might have been facing yet another rebellion over the income tax hike.

This a government with a whopping majority in the House of Commons. How it has repeatedly failed to get its policies through will be studied by political scientists for decades.

It was only a couple of days ago that not upsetting the bond markets was the reason to keep Reeves and Starmer in situ amid all the plot talk. It’ll be fun to see them try that on again over the weekend. The yield on 30-year gilts — a barometer for what investors think of Britain’s long-term prospects — jumped 10 basis points on the U-turn news.

--------

Watch Bloomberg Radio LIVE on YouTube

Weekdays 7am-6pm ET

Follow us on X

Subscribe to our Podcasts:

Bloomberg Daybreak

Bloomberg Surveillance

Bloomberg Intelligence

Balance of Power

Bloomberg Businessweek

Listen on Apple CarPlay and Android Auto with the Bloomberg Business app:

Apple CarPlay

Android Auto

Visit our YouTube channels:

Bloomberg Podcasts

Bloomberg Television

Bloomberg Originals