UK government bonds have outperformed their international peers since the Autumn Budget, with the yield on the 10-year gilt falling by almost 25 basis points, according to Deutsche Bank Research. The drop in borrowing costs has come despite a more hawkish than expected meeting of the Bank of England last week.

In a note published on 10 November, Deutsche Bank analysts Shreyas Gopal, Sanjay Raja and Maui Brennan said 10-year gilt yields had fallen by about 12 basis points more than their US and German equivalents since the Budget. They put the move down largely to global factors, including lower oil prices and higher volatility in equity markets.

What Deutsche Bank found

“10y gilt yields have fallen almost 25bps since the Autumn Budget. Global factors, such as the welcome fall in oil prices, have undoubtedly played a large role in this fall in borrowing costs, alongside an increase in equity market volatility,” the analysts wrote.

They added that the Budget had met their three pre-Budget benchmarks around fiscal headroom, near-term consolidation and total gilt issuance, which helped gilts fall by more than comparable bonds overseas.

“This relative outperformance over the past two weeks is even more notable given it has occurred either side of a more hawkish than expected Bank of England meeting last week – when UK bond yields rose by 5bps more than its peers,” the note said. “As such, even if not quite as stark as last year’s post-Budget gilt outperformance, we expect the Chancellor will be content with the market reaction to his first Budget.”

Budget day reaction

The market’s welcome for the Budget was clear on the day itself. The Times reported that gilts were the best performing large bond class on the Wednesday of the Budget, with the yield on 10-year gilts falling by as much as 0.05 percentage points to 5.31 per cent, and the yield on 30-year bonds falling by 0.04 percentage points. Gilt prices rallied while equivalent bonds sold off in the US, France and Germany.

Bond investors were cheered by the government’s modest spending plans and a £15 billion buffer against Labour’s fiscal rule, which was in line with City estimates. The Debt Management Office also said it would issue an additional £4.4 billion of debt next year, taking total debt issuance to £250.6 billion, matching forecasts. The UK will also move away from issuing longer-dated bonds, which lock in higher borrowing costs for longer, towards short-duration bonds to attract more investor interest.

“The budget was uneventful and this is exactly what the bond market wanted to see,” James Bilson, global fixed income strategist at Schroders, told The Times. The Chancellor, John Healey, said the Budget would deliver on “fiscal control”, with every policy funded through savings elsewhere or tax rises.

The Bank of England caveat

The fall in yields is striking because it has happened against a difficult backdrop for borrowers. UK market borrowing costs hit their highest level since 2002 earlier in October, pushing the 10-year gilt yield to 5.5 per cent, and the Bank of England’s rate decision last week was more hawkish than investors had expected.

Matthew Amis, investment director at the asset manager Aberdeen, said the Budget was “good enough” for jittery bond investors who had been roiled by a year of rising interest rates and worries over rising budget deficits in France and the US. He added that 2027 would present another fiscal challenge for the Chancellor, but that the Budget “should provide enough to reassure gilt investors going into the final months of [the year]”.

For the government, lower gilt yields mean cheaper borrowing. Whether the improvement lasts will depend on inflation, the path of interest rates and the state of the public finances when the Chancellor next updates his plans.