James Lynch, fixed income investment manager at Aegon Asset Management, notes the lasting impact of the 2022 Truss budget on Treasury policy and the predictable nature of the recent Labour budget. The gilt market response focused on debt issuance levels, which increased as anticipated but remained within projections.
“There is no getting away from the fact that the Truss budget of 2022 has had a lasting impact on HMT. It was the start of a very odd period in UK politics that ended the career of a chancellor and a PM.
“Perhaps it is then no surprise that the first labour budget in 15 years was already well trailed in the media in days and weeks before. There was not meant to be any surprises.
“I’m sure that when Rachel Reeves finished delivering her budget, one of the first things the chancellor would have wanted to have known, was how did the gilt market react?
“The reality is the gilt market is most interested in the amount of extra gilts coming to market for this fiscal year, this figure was an increase of £19.2bn which was broadly in line with expectations but perhaps more long end maturity gilts than expected. This brings total gilt sales this year to £297bn, looking at the projections the amount of gilt issuance is set to fall, next year (25/26) to £256.5 and then £233bn 26/27. However, over the next 4 years there will £20bn more issuance per year than before the budget, but again broadly in line that gilt issuance was set to increase given the fiscal rule changes.
“Lots of noteworthy information in the budget but less gilt relevant, including lofty assumptions on growth, 2.0% next year was eye catching.
“The gilt market has outperformed other markets today and is lower in yield. The truth was that the gilt market in recent weeks had been following US Treasuries higher in yield on the back of potential US election outcomes rather than fears on the budget. But to deliver a budget which included large increases in tax, spend & investment and gilt issuance and to have no negative impact on the market will be a relief to the chancellor and HMT. Perhaps the gilt market can finally put to the Truss issue behind it once and for all.”
