‘Relief rally’ for bonds, but trouble could be brewing

Chancellor Rachel Reeves visits University College London Hospital after delivering the Autumn Budget. Photo: Adrian Dennis - WPA Pool/Getty Images.

Rachel Reeves’ Autumn Budget has met with a positive response from the UK government bond market, although investors warn that plenty of uncertainty remains for the asset class.

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The yields on 30-year UK government bonds fell sharply on the day of the Budget, moving down to around the 5.2% mark, with Fidelity multi-asset portfolio manager Caroline Shaw noting: “The restoration of more fiscal headroom should be enough to placate the bond markets for now.” Yields move inversely to prices.

With the chancellor recommitting to her fiscal rules and having more fiscal headroom than expected, bond markets appear to have enjoyed a relief rally. Although not all specialists saw much to celebrate.

“We were left a bit puzzled by the positive reaction in gilts, and we would attribute the rally to the fact that there were no unexpected bombs dropped in the Budget,” said Felipe Villarroel, partner for portfolio management at specialist bond investor TwentyFour Asset Management. “At the same time, we don’t see an imminent risk of a sharp sell-off.”

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There is some cause for optimism, especially given that the Bank of England could now continue to cut interest rates. Government bonds tend to benefit as rates fall.

“With inflation continuing to ease, in addition to signals that the labour market is softening, we expect the Bank of England to resume rate cuts,” Shaw said.

“This should be supportive for gilts, an area where fundamentals are already improving, although we are cautious on government bonds overall due to the impact of tariffs on inflation and fiscal issues.”

Peder Beck-Friis, an economist at Pimco, echoed some of these sentiments, noting: “Our view remains that a weakening labour market and softening inflation will result in a deeper rate-cutting cycle than markets are pricing, and by helping to reduce inflationary pressures into next year the Budget has further reinforced those dynamics.”

More unknowns

Villarroel warned, however, that investors still had plenty of uncertainty to contend with.

“We do believe Reeves’ numbers are subject to a long list of variables moving in the right direction, and there is considerable uncertainty on some of these,” he said.

“We would not be surprised at all if, in the next few quarters, one or more of these variables deviates from the Office for Budget Responsibility (OBR)’s forecast and markets quickly start pricing in further measures as a result. For the time being, we continue to think there are better risk-off trades out there than gilts.

“We also believe UK corporate credit quality remains strong, and beyond potentially some high-yield issuers in the gaming sector, we don’t expect to see near-term weakness in UK corporate bond spreads.”

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Once viewed as a reliable safe-haven investment, UK government bonds have proved especially volatile in recent years, especially amid the disastrous ‘mini-Budget’ of 2022.

The average UK gilt fund is still sitting on a 23.6% loss for the five years to 26 November 2025. Its equivalent in the IA Sterling Corporate Bond sector, which focuses on higher-quality company bonds, is roughly flat over that same period.