Bond navigators: UK Budget – Chancellor treads tightrope between bond markets and own party

After 2024’s Halloween horror show, Chancellor Rachel Reeve’s Budget on Wednesday 26 November 2025 was an opportunity to pull open the Christmas Crackers early and inject some much-needed festive spirit into both the economy and the bond markets.

But, by the time the Budget arrived, much of the contents had been leaked by a government desperate to test both the public’s and the bond market’s reaction to potential policy announcements.

Despite all the leaks and U-turns, the market’s focus remained squarely on three key areas:

• Could the Chancellor cover the fiscal black hole credibly, and with enough headroom against her fiscal rules, or would the expected smorgasbord of tax hikes leave her short changed;
• Could the government design policies that might help tackle the UK’s inflation problem and keep the Bank of England (BoE) in play to cut rates further over the next 6-12 months; and
• How might the UK Debt Management Office (DMO) react to any changes to the gilt remit for the remainder of the 2025/2026 fiscal year.

Although the markets were well prepared, it was not really the mix of policy that markets were longing for. The black hole in the finances was covered not through spending cuts, but through a variety of tax increases.

The Chancellor’s Budget was a masterclass in mixed signals and contradictions as she attempted to appease both the bond markets and various factions within the Labour party; quite simply though, spending was higher, taxes were higher, and public sector borrowing rose. Although the markets were well prepared, it was not really the mix of policy that markets were longing for. The black hole in the finances was covered not through spending cuts, but through a variety of tax increases. And whilst the Chancellor’s headroom against her fiscal rules rose to £22bn, a little ahead of market expectations (which were closer to £10-£15bn), but much of the savings were back loaded, which will probably impact credibility.

The Office for Budget Responsibility’s (OBR) own assessment put the probability of the Chancellor meeting her fiscal rules at just 59%. And in terms of inflation, the markets were already forecasting that Consumer Price Inflation (CPI) would fall from 3.6% in October 2025 to around 2.6% in May next year. There were a number of small policy announcements such as freezing of rail fares and fuel duty that should help in achieving this. But the Budget was far from disinflationary, with an inflation busting rise in the minimum wage, and even larger rises to the minimum wage for 18-20-year-olds. Markets will worry what this might mean for public sector wage settlements as we move into 2026, particularly given they have recently been running well above both inflation and private sector pay rises. But that’s a consideration for another time.

And it is this weak growth, along with a declining inflation profile that was already forecast, that should keep the BoE in play to cut interest rates throughout next year.

As many business leaders have already warned, raising taxes even higher is unlikely to deliver the boost in economic growth that the UK so desperately needs. The economy is still struggling to recover from the decisions made just 12 months ago, as businesses saw with higher taxes and increased labour costs. None of Wednesday’s policy announcements are likely to reverse the fall in private sector business investment, nor will they encourage businesses to hire; the risk of today’s minimum wage announcements is that the cost of labour hurts hiring intentions, and that incentives to hire younger workers, in particular, have been hit the hardest.

With economic growth subdued, and unemployment rising steadily towards 5%, its highest level since the Covid pandemic in early 2021, and up 0.7% since last year’s Budget, that is potentially damaging for the labour market and the economy. And it is this weak growth, along with a declining inflation profile that was already forecast, that should keep the BoE in play to cut interest rates throughout next year.

The key announcement for UK gilts came after the Budget when the DMO provided an update to the gilt remit for the 2025/2026 fiscal year: with gilt issuance only rising by £4.7bn against consensus expectations of a £10bn increase.

During the Chancellor’s national address on Tuesday 4 November, she spoke about the need to make tough choices, the need to tackle the cost of living, and getting the cost of borrowing down. To some extent the Chancellor may have delivered on this, and she will be hoping that she has, for now at least, done enough to satisfy both the bond markets and Labour MPs. But the key announcement for UK gilts came after the Budget when the DMO provided an update to the gilt remit for the 2025/2026 fiscal year: with gilt issuance only rising by £4.7bn against consensus expectations of a £10bn increase. The DMO was able to cancel five of the remaining planned auctions this fiscal year: one short-dated; two long-dated and two index linked auctions.

The DMO is effectively starving the market of long-dated gilt supply, with no long maturity auctions planned until the new fiscal year in April 2026. That sent yields materially lower, led by the longer end of the curve. The DMO has done an excellent job, delivering once again in what has been a tricky year. With the Budget and all the headlines it has generated behind us, with the bond markets just about onside for now, and with the Chancellor having bought herself some time with her own MPs, gilts will focus more on the upcoming economic data releases and supply schedule; with that in mind, and in our view, should be well placed to have a strong finish to the year.

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