What might be the reaction of bond markets to tomorrow’s budget? Jupiter’s Huw Davies shares his views

With Rachel Reeves set to deliver her much-anticipated budget speech tomorrow, Huw Davies, Investment Manager, Jupiter Strategic Absolute Return Bond Fund, has shared his comments ahead of the UK Budget saying:

Rachel Reeves has flagged to the market that she is likely to change the definition of debt to an alternative, Public Sector Net Financial Liabilities (PSNFL). Given the extremely poor market reaction to the Conservative mini budget in September 2022, Reeves and the new Labour cabinet are understandably wary of creating a similar market reaction. However, the circumstances are very different especially around the inflation outlook. With UK inflation around target and having if anything come in under expectations recently, the market worries are significantly reduced around any inflation risk relative to 2022.

The forward inflation markets are actually pricing very little additional risk or volatility to the UK because of these measures. This is probably because the markets believe that Reeves won’t use the full amount of available ammunition in spending, limiting the amount of headroom used to around £20bn and only for investment purposes, as she looks to avoid the mistakes of 2022. If that proves not to be the case when she stands up on Wednesday and she is more aggressive on spending or the definition of investment, then we may see a less favourable reaction from bond markets.” 

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