Following the UK Budget announcement, gilts have surged on optimism over inflation forecasts and fiscal headroom, yet market participants remain wary of the government’s commitment to sustainable fiscal plans amid conflicting signals and increased welfare spending.
Bond market participants are preparing for renewed volatility following the UK Budget announcement by Finance Minister Rachel Reeves, amid cautious optimism tempered by concerns over the sustainability of fiscal plans and their impact on gilts and sterling.
An improved inflation outlook has helped push UK government bonds, or gilts, to their best performance since the onset of the Covid-19 pandemic. Inflation data and forecasts published by the Office for Budget Responsibility (OBR) have played a key role in this rally. The OBR now projects inflation will average 3.5% in 2025 and moderate to 2.5% in 2026, higher than prior forecasts, but with an anticipated return to the Bank of England’s 2% target by 2027. This softer inflation trajectory has bolstered expectations that the Bank may cut interest rates as soon as December, fostering further gilt market support.
Reeves’s budget set out substantial tax increases targeting workers, pension contributors, and investors, aiming to boost government fiscal headroom significantly. The OBR estimated a £22 billion headroom margin over the next five years, surpassing market expectations. This strengthened fiscal position helped alleviate some market concerns about the UK’s borrowing trajectory, prompting many investors to increase their exposure to longer-dated gilts. After the budget, bond yields fell sharply, the biggest decline since April, and sterling strengthened.
Yet, despite these positive signals, the bond market remains wary. The Treasury’s retreat from a previously hinted manifesto-breaking income tax rise has shaken some investor confidence in the government’s commitment to credible fiscal tightening. Market participants suspect that the government might instead pursue a “smorgasbord” of smaller tax increases that take time to yield meaningful revenue and are harder to model accurately. Additionally, the Treasury’s plans to increase welfare spending, notably a £3 billion move to remove the two-child benefit cap, have raised doubts about the budget’s long-term sustainability.
David Zhan, head of fixed income at Franklin Templeton, described the potential combination of increased immediate welfare expenditure with delayed tax revenue as a “spend now, pay later” approach unlikely to sit well with bond investors. This mix of fiscal stimulus with postponed revenue may be perceived as unsustainable, creating jitters in the gilt markets.
Reflecting these nuanced risk perceptions, large asset managers have adopted varied responses. Vanguard, Allianz Global Investors, and some others modestly increased their gilt holdings post-budget, while firms like Franklin Templeton and BlueBay Asset Management remain cautious. Some actively sought to hedge risks; for instance, funds overweight in gilts have taken put options on sterling to mitigate currency risk tied to potential sell-offs.
Despite these challenges, some fund managers remain broadly constructive. James Carter of W1M anticipates targeted cost-of-living support combined with fiscal buffer rebuilding to be positive for gilts in the medium term. Similarly, John Stopford of Ninety One observed that while bond market confidence in fiscal tightening has waned following the income tax U-turn, optimism about inflation’s path and a likely Bank of England rate cut persists.
Beyond domestic factors, international fixed income markets add a supportive dimension. Lower US bond yields have provided a transatlantic tailwind, helping soothe UK market nerves ahead of the budget unveiling. Brokerage firms like Nomura have reflected this improved risk sentiment by closing out bearish sterling trades, reinforcing an upbeat outlook for the pound.
Looking ahead, investors face a delicate balancing act. Bond market gains have been underpinned by hopes for a credible fiscal framework combined with inflation easing. However, lingering doubts about the government’s chosen fiscal consolidation path and the implications of increased welfare spending mean gilts might remain vulnerable to bouts of volatility. Investors and policymakers alike will be closely watching upcoming fiscal and economic data to assess whether the UK can sustain its improved debt profile without reigniting fiscal or market instability.
- https://www.cityam.com/bond-market-braces-for-gilt-and-sterling-tremors-gilts-bonds/ – Please view link – unable to able to access data
- https://www.reuters.com/world/uk/uk-inflation-average-25-2026-obr-forecasts-2025-11-26/ – The Office for Budget Responsibility (OBR) forecasts that UK consumer price inflation will average 2.5% in 2026, an increase from the previous estimate of 2.1%. This revision follows recent data showing inflation at 3.6% in the 12 months to October 2025. The OBR also raised its inflation forecast for 2025 to 3.5%. The moderation in October’s inflation has strengthened market expectations of a potential interest rate cut by the Bank of England in December.
- https://www.reuters.com/business/finance/sterling-uk-bond-prices-rise-whippy-trading-reeves-budget-soothes-some-nerves-2025-11-26/ – Following the UK budget announcement by Finance Minister Rachel Reeves, investors surged into long-dated UK bonds, driving down yields significantly—the biggest drop since April—and boosting the value of the pound. Reeves’ budget included tax increases on workers, pension savers, and investors, aiming to give the government more fiscal headroom and meet borrowing targets. The Office for Budget Responsibility (OBR) reported headroom of nearly £22 billion in five years—higher than market expectations.
- https://www.reuters.com/business/nomura-closes-trade-recommendation-buy-euros-sterling-2025-11-26/ – Following the UK budget announcement by Finance Minister Rachel Reeves, several brokers adopted a more optimistic stance on British government bonds (gilts) and the pound. The budget, characterized as a significant tax-raising plan, alleviated major risks that had previously threatened sterling. Nomura closed its euro-to-sterling trade recommendation, citing the increased fiscal headroom and anticipating a removal of short positions against the pound, which could support its appreciation.
- https://www.reuters.com/world/uk/big-investors-welcome-reeves-extra-headroom-fret-over-long-term-2025-11-26/ – Big investors have generally welcomed UK Finance Minister Rachel Reeves’ decision to double her financial buffer—the fiscal “headroom”—in an effort to better shield the economy from shocks. Reeves announced a budget that includes £26 billion in tax hikes aimed at helping meet fiscal targets, exceeding market expectations despite rising welfare spending. While some investment firms, like Vanguard and Allianz Global Investors, slightly increased their holdings in UK government bonds (gilts) post-announcement, others like Franklin Templeton, Northern Trust Asset Management, and BlueBay Asset Management remain cautious.
- https://www.reuters.com/markets/europe/budget-wary-uk-markets-get-transatlantic-balm-2025-11-26/ – As Britain’s Finance Minister Rachel Reeves prepares to unveil a highly anticipated budget plan, financial markets are showing signs of cautious optimism, partly buoyed by falling U.S. bond yields that have created a supportive backdrop. Reeves is expected to introduce several tax hikes to meet fiscal rules without breaching a promise not to raise income tax. Despite weeks of investor anxiety and political stakes for the Labour government and Prime Minister Keir Starmer, much of the fiscal strategy appears already priced into the markets.
- https://www.twentyfouram.com/insights/gilts-in-precarious-spot-with-uk-at-economic-crossroads – On inflation, the OBR raised its projected 2025 average to 3.2% (from 2.6% in 2024) before ‘falling rapidly’ to 2.1% in 2026 and returning to the Bank of England’s 2% target by 2027 – two years ahead of its prior 2029 projection. Gilts started the day in positive territory, buoyed by the inflation data, though gains remained muted amid caution surrounding Reeves’ plans. However, following more encouraging Gilt issuance plans for the long end, the curve flattened, with the 30-year yield rallying by 6bp, the 10-year by 3bp and the two-year by 1bp.
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emerged. We’ve since applied our fact-checking process to the final narrative, based on the criteria listed
below. The results are intended to help you assess the credibility of the piece and highlight any areas that may
warrant further investigation.
Freshness check
Score:
10
Notes:
The narrative is current, published on 26 November 2025, and discusses recent developments following the UK Budget announcement by Finance Minister Rachel Reeves. No evidence of recycled or outdated content was found. The report includes recent data and quotes, indicating high freshness.
Quotes check
Score:
10
Notes:
The quotes from Richard Carter, head of fixed income research at Quilter Cheviot, are unique to this report. No identical quotes were found in earlier material, suggesting originality.
Source reliability
Score:
8
Notes:
The narrative originates from City AM, a UK-based business news outlet. While it is a known publication, it is not as widely recognised as some other UK financial news sources. The report cites a reputable expert, Richard Carter, enhancing its credibility.
Plausability check
Score:
9
Notes:
The claims about bond market reactions to the UK Budget announcement align with recent market movements and analyses. The narrative provides specific figures, such as the 10-year gilt yields falling by over half a percentage point since January, which are consistent with other reputable sources. The language and tone are appropriate for the topic and region.
Overall assessment
Verdict (FAIL, OPEN, PASS): PASS
Confidence (LOW, MEDIUM, HIGH): HIGH
Summary:
The narrative is current, original, and aligns with recent market developments. The source is reasonably reliable, and the claims made are plausible and supported by specific data. No significant credibility risks were identified.