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Vanguard said Wednesday’s Budget has cleared the path for the asset management giant to buy more UK government bonds, as chancellor Rachel Reeves’ tax-raising plans were given a warm reception by gilt investors.
“We feel comfortable to come back to the UK market and add gilt exposure,” said Ales Koutny, head of international rates at the world’s second largest asset manager.
UK borrowing costs, which are the highest in the G7, should now begin to close the gap with those in other big economies, he added.
Koutny said the “selling point” was Reeves’ decision to restore the government’s fiscal headroom to £22bn, a bigger margin of error against self-imposed borrowing rules than markets had anticipated.
“There was a lot of fear that they were going to make [the headroom] as low as possible,” Koutny said. “The event risk itself was something to be fearful of. Just getting through that seems like a positive.”
The comments from the $11tn asset manager came as gilts rallied after the chancellor raised taxes by £26bn, taking the projected tax burden by the end of the current parliament to an all-time high.
Benchmark 10-year borrowing costs, which move inversely to bond prices, fell 0.08 percentage points to 4.42 per cent. Thirty-year bond yields, which are even more sensitive to worries over excessive government borrowing, fell more sharply.
The pound rose 0.4 per cent against the dollar at $1.321.
The moves represent a sigh of relief from a gilt market that had been in a state of high anxiety heading into the Budget.
UK government bonds had sold off sharply two weeks ago when Reeves ditched plans to raise income tax, leaving investors wondering how she would plug the resulting fiscal gap.
Fund managers were also worried about a potential rerun of Reeves’ first Budget a year ago, when her inflationary tax-raising plans sparked a gilt sell-off.
Instead, most welcomed lower-than expected gilts issuance plans for the current financial year that were announced alongside the Budget, and the cancellation of some long-term debt sales.
“If we get a period of relative political stability, until the local elections, then long-end gilts can perform well into year-end,” said Matthew Amis, investment director for rates management at Aberdeen Investments, adding that the manager bought 30-year gilts on Wednesday.
Neuberger Berman, a US fund manager, also added to its gilts position after the early leak of the Budget outlook.
“We viewed the chancellor’s Budget approach as supportive of market stability,” said portfolio manager Kostas Deslis.
However, some investors warned that the gilt rally might prove shortlived if the government struggles to push through unpopular measures closer to the next general election.
Mark Dowding, chief investment officer for fixed income at RBC BlueBay Asset Management, pointed to backloaded spending cuts and tax rises, adding that “there are a number of revenue-raising measures which look pretty uncertain”.