Three Reasons to Stay Bearish on Gilts After the UK Autumn Budget

Three Reasons to Stay Bearish on Gilts After the UK Autumn Budget:

• Rising Inflationary Pressure: The budget poses inflation risks, with higher wages and National Insurance costs increasing labor expenses, especially in hospitality. GBP100 billion in public investment could further drive inflation, worsen skills mismatches, and crowd out private borrowing.
• Elevated Gilt Issuance: Gilt issuance rises to GBP300 billion this year, plus GBP94.9 billion over four years, raising sustainability concerns. Careful management is needed to avoid market disruptions and negative impacts on investor sentiment and pricing.
• Fiscal Sustainability Concerns: Despite growth initiatives, the OBR's lowered post-2026 forecasts suggest limited benefits. High borrowing and tight fiscal space raise concerns about economic shock resilience and borrowing costs.

Keep reading to dive deeper and learn just how high 10-year Gilt yields could climb, along with ways to gain exposure to this trend…

Gilt yields are rising today, one day after the UK Autumn Budget, primarily because the announced budget implies a significant increase in government borrowing. Specifically, the Debt Management Office (DMO) has outlined plans for GBP300 billion in gilt issuance for 2024-25, an increase of GBP20 billion from previous estimates. This expanded borrowing requirement puts pressure on gilt prices, pushing yields higher as investors demand more return to absorb the growing supply of government debt.

Looking ahead, there are compelling reasons to anticipate that Gilt yields may continue to rise. Inflationary pressures stemming from the budget—such as higher minimum wages and increased employer National Insurance contributions—could prompt markets to expect a more cautious approach from the Bank of England concerning rate cuts. This mix of increased inflation risks and higher supply expectations is likely to exert sustained upward pressure on yields over the longer term.

Here are three key reasons why Gilt yields may continue to surge in the next few weeks:

1. Rising Inflationary Pressure:
   • The budget introduces significant inflationary risks. For instance, large increases in the minimum wage and employer National Insurance costs will likely raise labor costs in many sectors, particularly low-paid service industries like hospitality. This could exacerbate wage inflation and lead to higher prices in these sectors, contributing to broader services inflation.
   • The planned GBP100 billion in public investment over five years, though aimed at stimulating economic growth, may further fuel inflation in the medium term. Additionally, skills mismatches could worsen, driving up wages in certain sectors. This increased public investment could crowd out private sector borrowing and put upward pressure on interest rates.

    

2. Impact on Gilt Issuance:
   • The budget necessitates higher levels of gilt issuance, amounting to GBP300 billion for the current fiscal year and an additional GBP94.9 billion spread over the next four fiscal years. This significant increase adds to concerns about the sustainability of government borrowing.
   • The issuance strategy has shifted focus from short-term to medium- and long-term gilts, requiring careful management to prevent market disruptions. The DMO has planned to diversify issuance across various maturities and maintain a regular schedule of syndications and auctions, which could impact investor sentiment and the pricing of gilts.

    

3. Slower Growth and Rising Concerns Over Fiscal Sustainability:

• While the budget aims for growth and investment, the Office for Budget Responsibility (OBR) has revised growth forecasts lower from 2026 onwards, suggesting limited long-term economic benefits from these measures. The fiscal rules, while providing a framework for stability, offer limited headroom, raising concerns about the government’s ability to respond to economic shocks without additional borrowing.
• The upward revisions in future borrowing requirements suggest sustained high levels of gilt issuance, which could increase the cost of borrowing for the government and potentially affect the broader economy.

Key Technical Levels to Watch for 10-Year Gilt Yields

Following the UK Autumn Budget, 10-year Gilt yields have broken through resistance at 4.35%, advancing to 4.43%, a level last reached during the autumn of 2023. The overall sentiment remains bearish, with yields showing potential to test the next resistance at 4.75%. If yields manage to break above this significant level—which aligns with the 2023 peak—they could extend their upward trajectory toward the 5% mark, a level not seen since before the 2008 Global Financial Crisis.