10-year bond yields rise as investors question credibility of budget plans
Some UK bond yields are now moving a little higher, as the City continues to analyse the budget.
The yield (or interest rate) on 10-year gilts has gained four basis points to 4.46% today, which erodes around half of the recovery in yields yesterday.
Investors will have noted that while the spending increases in the budget happen quite soon, the tax rises are more back-loaded.
As City firm TS Lombard put it:
-
Tightening is mostly kicked into the back-end of the forecast period, with policy actually adding to borrowing in the next few years.
-
The UK is left with a bigger state funded by higher taxes, while fiscal headroom and debt dynamics remain fragile.
French bank BNP Paribas warn the budget could be “built on shaky foundations”, and question whether the government would really push through tax rises close to the next election.
They say:
Whether by luck or judgement, the budget delivered a policy mix that is likely to appease the parliamentary Labour party, voters, and even the market – at least for now.
This is because the fundamentals of it came broadly in line with market expectations, giveaways on welfare spending and avoidance of a manifesto breach should quell fears of rebellion within the party, and voters are likely to feel the positive impact of lower energy bills.
That said, questions around the credibility of the measures remain, particularly around their backloaded timing – which happens to coincide with the next general election – and the government’s ability to deliver them.
Key events
JP Morgan’s head of European rates strategy research has also questioned whether those pre-election tax rises will actually happen.
“The near-term uncertainty around the budget and what the budget could have delivered in terms of the gilt market has been removed because headroom is bigger,” Francis Diamond told Reuters, adding this would mean fiscal policy would be less sensitive to swings in borrowing costs next year.
Diamond added:
“Over the medium term, I think there is always a difficulty… as you approach the 2029 election, whether those tax raising policies are delivering what they need to deliver.”
These charts from the Institute of Fiscal Studies today show how the longer freeze on income tax thresholds mean more people will be dragged into become higher rate taxpayers….
…. which this shows the short-term and long-term impact on households across the income scale:
Next year households will see gains from additional energy bill support and the effects of removing the two-child limit.
But by 2029–30, the big tax rises will have kicked in, particularly hitting middle and higher-income households. pic.twitter.com/TibpTLU2oR
— Institute for Fiscal Studies (@TheIFS) November 27, 2025
Analyst: Budget calm masks doubts over £26bn tax plan
Athough the financial markets remain calm after the budget, there is certainly the sound of scepticism about whether the fiscal tightening (tax rises) outlined yesterday will actually happen.
Although investors welcomed the doubling of the chancellor’s fiscal rule headroom, thanks to £26bn of tax rises, the fact those moves are ‘back-loaded’ raises questions about the credibility of the plan [as flagged at 10.56am].
Reminder: Reeves is now on track to hit her target of a balanced current account in 2029-30 with a margin of £22bn. But as 2029 is the latest the next election can happen, there could be pressure on Downing Street to delay the measures.
Antonio Ruggiero, FX & Macro Strategist at foreign exchange firm Convera, explains:
One key takeaway is that many of the policies announced are back‑loaded, meaning they will not be implemented for several years. This undermines the predictability that markets crave – a more welcome approach would have been to bring more of the fiscal pain forward into 2026. Early implementation builds credibility, reduces the risk of policy U‑turns (of which we have seen plenty this year), and crucially brings revenue in faster.
What complicates this dynamic is Reeves’s reliance on a large number of small policy fixes: about 88 measures announced yesterday, compared with an average of 57 at fiscal events over the past decade. That complexity, combined with the back‑loaded implementation, raises questions about the reliability of the £26bn in planned tax revenues she aims to collect.
Yet markets appeared calm: sterling traded higher while gilt yields fell. The larger‑than‑expected headroom was clearly well received. Recall that it was revealed before Reeves even presented her plan, creating a cushion that reassured investors and effectively raised their tolerance threshold for policies they might have otherwise disliked from the outset.
Halfords reports rise in bike sales
Sarah Butler
Halfords has seen an increase in sales of bicycles for the first time since 2022 as the warm summer got the UK peddling again.
Henry Birch, the chief executive of the cycles and car parts retailer which also operates car servicing centres, said sales of cycles and related kit rose 9% in the six months to 26 September with increases from all aspects of the market, from ebikes and expensive road bikes to children’s wheels.
He said Halfords had been winning market share helped by a number of factors, including more affordable ebikes, as the industry had recovered from a pandemic
boom which turned to a slump.
“We are now on a more even keel,” he said. “This is not just a middle class mamil boom,” referring to the trend for certain middle-aged men to get fit clad in lycra on two wheels, “this is not just about the cost of living but good product meeting increased demand.”
However he said itwas “difficult to tell” if that demand would subside after a change in the weather.
Birch said Halfords, where 80% of sales now relate to motoring, was “cautiously optimistic” for December after reporting a 3.3% rise in total sales in the half year to £893.3m with pre tax profits down 3.4% to £17.2m.
He said most of its shoppers were basic rate tax payers who have “survived [this
week’s] budget relatively unscathed”. “Christmas is still unknown, but we are definitely not in the territory of spend, spend spend,” he said.
Goldman Sachs has announced plans to grow its Birmingham office and double its workforce from 500 to over 1,000 in the “coming years”.
The banking group said it formed part of efforts to “deepen our commitment to the UK economy”.
That comes alongside JP Morgan’s plan to build a new London HQ in Canary Wharf, announced this morning.
10-year bond yields rise as investors question credibility of budget plans
Some UK bond yields are now moving a little higher, as the City continues to analyse the budget.
The yield (or interest rate) on 10-year gilts has gained four basis points to 4.46% today, which erodes around half of the recovery in yields yesterday.
Investors will have noted that while the spending increases in the budget happen quite soon, the tax rises are more back-loaded.
As City firm TS Lombard put it:
-
Tightening is mostly kicked into the back-end of the forecast period, with policy actually adding to borrowing in the next few years.
-
The UK is left with a bigger state funded by higher taxes, while fiscal headroom and debt dynamics remain fragile.
French bank BNP Paribas warn the budget could be “built on shaky foundations”, and question whether the government would really push through tax rises close to the next election.
They say:
Whether by luck or judgement, the budget delivered a policy mix that is likely to appease the parliamentary Labour party, voters, and even the market – at least for now.
This is because the fundamentals of it came broadly in line with market expectations, giveaways on welfare spending and avoidance of a manifesto breach should quell fears of rebellion within the party, and voters are likely to feel the positive impact of lower energy bills.
That said, questions around the credibility of the measures remain, particularly around their backloaded timing – which happens to coincide with the next general election – and the government’s ability to deliver them.
IFS: Reeves’s budget plans could be ‘fiscal fiction’
Richard Partington
Rachel Reeves has risked Labour campaigning for the next general election on tax and spending plans which could amount to “fiscal fiction,” the Institute for Fiscal Studies has warned.
In its verdict on the chancellor’s autumn budget, the leading experts on the public finances said Reeves had delayed tax rises and baked-in spending cuts that kick-in just before voters next go to the polls in 2029.
Helen Miller, the IFS director, says:
“The fiscal forecasts are predicated on spending plans that would involve near-heroic restraint in an election year, and a back-loaded set of tax rises that almost entirely delay the pain.
It’s reminiscent of the fiscal fictions of recent years. I hope this is a government able to deliver on it’s plans. But I have my doubts.”
With Labour trailing Nigel Farage’s Reform UK in the opinion polls, the thinktank said basic-rate taxpayers will be expected to pay £220 more tax per year by 2029, while those on a higher-rate will pay £600 more per year.
Reeves placed a massive £15bn increase in personal taxes at the centre of her revenue-raising efforts – centred on a longer-than-anticipated three-year freeze in tax thresholds.
One in four workers will be paying the higher income tax rate by 2030 because of that freeze, which opposition parties described as a war on the middle class.
Although the serious breach by the OBR raises questions that need to be addressed urgently, it is fair to point that things could have gone much “worse”, Professor Costas Milas of the Management School at the University of Liverpool tells us:
As it turned out to be the case, movements in yields and sterling during the breach were not that big. Think, however, of the alternative where the OBR report was assessing the implications of an income tax rise.
This would have indeed been a very surprising tax measure (since it was ruled out previously) which would have impacted hugely on markets.
Ironically, then, all these mild Budget-related leaks over the previous days ensured that yesterday’s serious breach had less of a financial impact than otherwise!
This chart shows how 10-year bond yields briefly gyrated when news alerts about the OBR’s forecasts reached trading desks around 11.41am yesterday, nearly an hour before the chancellor began her speech.
Less positively, worries about the UK economy could also prompt the Bank of England to cut interest rates in the months ahead.
Yesterday the Office for Budget Responsibility lowered its forecast for real GDP growth to an average of 1.5% between 2026 and 2029, down from 1.8% in March.
That, and the OBR’s cut to trend productivity growth, has darkened the growth outlook.
Sylwia Hubar, UK economist at Natixis CIB, says:
In our opinion, the strict fiscal stance is likely to weigh on growth outlook next year, which should pave the way to more monetary policy accommodation in line with our expectations.
Dutch bank ABN Amro agrees that the Bank of England is now more likely to deliver a Christmas rate cut.
They explain:
The most consequential measure in yesterday’s budget from a monetary policy point of view was a fall in household energy bills, with the government now part-funding the renewables levy on energy bills. This, alongside other measures such as the now obligatory annual freeze in fuel duty, will lower inflation by 0.3pp next year.
Already, financial markets had been pricing a higher risk of a December cut after somewhat more benign incoming data. Barring a big upside surprise in the November CPI data – released 17 December – we now expect the MPC to lower Bank Rate by 25bp to 3.75% when it meets the day after on the 18th.
December UK interest rate cut more likely after budget
A cut to UK interest rates next month is looking a near-certainty after the budget.
The money markets are indicating there’s a greater than 90% chance that the Bank of England lowers base rate by a quarter of one percentage point at its 18 December meeting, down from 4% to 3.75%.
That’s up from around 85% earlier this week, before the budget.
Shares in housebuilders, who could see higher demand if rates are lower, have risen this morning; Persimmon are up 1.6%, leading the risers on the FTSE 100 share index.
Rate cut expectations have risen because some budget measures are deflationary, such as cuts to energy bills and the freeze on rail fares.
The money markets are predicting over 60 basis points of cuts to Bank Rate by the end of next year, whch indicates two quarter-point cuts are fully priced in with the possibility of a third.
Benjamin Jones, global head of research at Invesco explains:
The budget is a little less contractionary than some feared given income tax rates were left untouched. But it is still deflationary and with recent inflationary trends already showing less pressure the Bank of England can now be expected to resume its cutting cycle. We expect the BoE to cut in December and marginally more in 2026 than is currently priced by money markets.
That should mean mortgage rates fall more quickly and new rates move below outstanding rates. The mortgage squeeze UK households have experienced in recent years should start to shift to easing and allowing households to become a but more willing to spend.
The financial markets’ reaction to the budget is a case of “so far, so good”, reports Moody’s Analytics.
Andrew Hunter, their senior economist, says:
After a brief spike amid the OBR’s premature publishing of its fiscal forecasts, the 10-year U.K. gilt yield was slightly lower on the day, while sterling and the U.K. stock market were both up.
Markets appear to have welcomed the increase in fiscal headroom, and the chancellor’s announcement that the government will move to only one fiscal assessment by the OBR each year should also help restore some predictability to U.K. fiscal policy.
Here are the key points from their analysis:
-
As expected, the government announced another round of tax hikes in November’s budget. But this was partly offset by higher spending and the net fiscal tightening is set to be smaller than assumed in our November baseline
-
This was helped by new forecasts from the Office for Budget Responsibility which left the government with a much smaller fiscal hole to fill than had been widely rumoured
-
The OBR forecasts that the government will meet its key fiscal target of balancing the current budget by 2029-2030 by a margin of £22 billion, a larger degree of headroom than it had before
-
The budget presents upside risks to our forecast for GDP growth in the near term, but fiscal consolidation will still weigh on the economy over the coming years
Gambling group Flutter is also expecting a hit to profits from the new gambling taxes.
Flutter, whose brands include FanDuel, PokerStars, Paddy Power and Betfair, told the City this morning that the tax increase will impact its underlying earnings by around $320m (£240m) in 2025-26 and $540m in 2026-27.
It hopes to offset the hit by up to 40% by 2027 though cost reductions including cutting promotion and marketing spend
Kevin Harrington, UKI CEO of Flutter, says the budget tax increases are “a very disappointing outcome”, adding:
The Chancellor rightly wants to address harm, but these changes will hand a big win to illegal, unlicensed gambling operators who will become more competitive overnight. These black market operators don’t pay tax and don’t invest in safer gambling. At 40 percent, the UK’s remote gaming duty is now above countries such as the Netherlands, where a recent tax increase saw a rise in illegal gambling and a fall in Government receipts.
Yesterday Meg Hillier, the chair of the Treasury select committee, said Reeves had rightly refused to bow to industry “scaremongering” about the impact of higher taxes.
Gilts calm as UK budget pleases bond markets
The bond market continues to take the budget in its stride.
Benchmark UK 10-year gilts are trading flat today, after a recovery in bond prices pushed down the cost of borrowing on Wednesday.
Yields on 30-year gilts have fallen again today too – down another 0.03 percentage points to 5.2%, adding to yesterday’s rally.
Analysts at bank ABN Amro say the chancellor gave the City a positive surprise by doubling her headroom to keep within the fiscal rule.
They explain:
The primary fiscal rule is that the debt ratio must be falling by year 4 of the forecasting horizon. The government now has a headroom of £22bn against meeting this rule (0.6% of GDP), more than double that of the previous budget (£10bn headroom) and approaching that of the historic average (£29bn).
This led the Office of Budget Responsibility (OBR) to modestly raise its probability of the government meeting the fiscal rules to 59% from 54% previously – still on the low side, but an important step in the right direction in our view.
Betting company share drop after budget tax hike
In the City, shares in some betting companies are dropping sharply after they reported that the new gambling levies in the budget will hit their earnings.
Rank Group, which runs Grosvenor Casinos and Mecca bingo, have dropped by 10% in early trading.
Evoke, the firm behind William Hill, 888 and Mr Green, are down over 5%.
Last night, Rank Group told shareholders that it expect a hit of about £40m to its annual operating profit from the UK’s tax changes which begin in April 2026.
Evoke estimates that the tax changes will increase its duty costs by approximately £125-£135m per year, and that it could mitigate half that cost through savings and retail store closures.
In the budget, Rachel Reeves almost doubled the Remote Gaming Duty – which applies to gaming over the internet, telephone, by television, or radio – from 21% to 40% and abolished Bingo Duty.
The changes are expected to raise an extra £1.1bn a year by 2029-30.
Reeves: have confidence in OBR after ‘serious error’
Rachel Reeves has expressed confidence in the Office for Budget Responsibility, and its chief Richard Hughes, over yesterday’s leak.
She told Sky News that the incident was a serious breach by the OBR, and mustn’t be repeated, saying:
Richard Hughes wrote to me yesterday evening, apologising for their error. It was a serious error and a serious breach.
They have announced an investigation which will report to me very quickly.
But I do have confidence in Richard and the OBR. They do important work, but what happened yesterday let me down. it shouldn’t have happened and it must never happen again.
