In the run up to the update from UK Chancellor Rachel Reeves on the allocation of funds on Wednesday, UK gilt yields edged slightly higher.
While the spending review was not expected to unveil any new spending, it did put the spotlight on strained public finances when discussing how existing funds will be allocated. Markets remain nervous about the potential for either higher taxes or an increase in borrowing in the future.
An increase in taxes may be seen as more ‘market friendly’, but would be politically damaging, while an increase in borrowing (funded through gilt issuance) would put further pressure on already elevated gilt yields.
Following the spending review, there was a rally in longer dated gilt yields, with the UKT 10 year and 30-year gilt at 7bps in the hour following the announcement.
The rally in gilt yields had nothing to do with the spending review but came on the back of a lower-than-expected CPI print in the US. This highlights the still high correlation of UK gilts to US treasuries, and while fiscal concerns in the UK will no doubt keep gilt yields higher for longer, daily volatility in gilt prices will also come from data and decisions from the other side of the Atlantic.
