Labour is reported to have ditched their plans to increase income taxes, which would be a meaningful U-turn and potentially has big consequences for future debt affordability. Meanwhile, gilt yields have spiked up in early trading, but could fall again with additional information.
Hal Cook, Senior Investment Analyst at Hargreaves Lansdown, has shared his thoughts.:
“The news that Labour may be U-turning on their planned income tax increases has sparked a wide ranging sell off in gilts this morning. Investors have been worried about the UK’s deficit for some time, which has pushed gilt yields higher, particularly longer-dated yields. Since the start of October, these had been falling, partly linked to the expectation that the upcoming Budget would have a meaningfully positive impact on the long-term debt dynamics for the UK.
Increases in tax are deemed to be a big part of the plan to tackle the deficit. So, the news that the likely income tax rises have been scrapped hasn’t gone down well with gilt investors.
Gilt yields of all maturities have spiked this morning, meaning prices have fallen. At the time of writing, the yield on 10-, 20- and 30-year gilts have all spiked around 12 basis points. Longer-dated gilts have therefore seen larger price falls, even though the yield change is the same (because the higher yield will be paid for a much longer period of time, meaning today’s price has to change by a larger amount).
As is often the case with quick reaction to surprising news, it’s likely that these moves are over-reactions and yields definitely have potential to come back down from here. Just because Labour may no longer be planning on increasing income tax, we don’t yet know what they may plan to do instead. Government bond markets definitely have the power to keep government budgets in check, as we saw in the UK with the Truss mini-Budget in 2022 and in the US around Liberation Day earlier this year. Watch this space.”
