Rachel Reeves walks inside the IMF headquarters holding a folder, wearing a teal suit and colourful scarf, during the G20 meeting.
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UK gilts have experienced a significant upswing, leading to a reduction in borrowing expenses for the government as Chancellor Rachel Reeves plans for potential tax hikes and budget cuts in the upcoming Budget.

This week, the yield on the UK’s benchmark 10-year bonds, which inversely correlates with bond prices, has decreased by 0.18 percentage points, dropping below 4.5 percent. This marks its most substantial weekly decline since April.

Recently, global sovereign bond yields have been pulled lower due to growing anticipation of interest rate cuts by the US Federal Reserve and instability within the credit market.

Investors have noted that the Treasury’s favorable communications, including Reeves’ openness to considering public spending reductions along with tax hikes—and hints from her associates about increasing the fiscal leeway under her borrowing guidelines—have been beneficial.

“The signals are encouraging,” remarked Gordon Shannon, a fund manager at TwentyFour Asset Management. “Including spending in the discussions was unexpected, especially after recent political challenges.”

Line chart of 10-year gilt yield (%) showing The UK’s borrowing costs are lower than where they started 2025

It is unclear whether the rally will help reduce the size of the fiscal hole that Reeves will need to fill next month to meet her rule of running a current budget surplus by the end of the Office for Budget Responsibility’s forecast period in 2029-30. The shortfall is estimated by the Institute for Fiscal Studies at about £22bn, of which £5bn is due to higher borrowing costs.

That is because the OBR has not yet disclosed which 10-day window it is using to measure the market prices that underpin its forecasts.

Jack Meaning, UK chief economist at Barclays, said the recent rally in gilts could reduce the direct hit from higher borrowing costs by about £2bn if it is captured by the observation window.

But Robert Wood, chief UK economist at the consultancy Pantheon Macroeconomics, said going by the timetable the OBR had followed in the run-up to last year’s Budget, the window is likely to have closed.

The OBR this week declined to say what period it is using this year, adding that it often published this information two weeks before the Budget.

The UK still has the highest borrowing costs in the G7, thanks to persistent inflation and concerns over its debt load. The 10-year yield hit a 16-year high of 4.93 per cent in January as concerns over the UK’s near-record gilts issuance combined with a global sell-off in bond markets.

Gilt investors have called on the government to build a larger buffer against its fiscal rules than the slim £9.9bn of margin left at the past two fiscal events.

But some investors contrast the UK positively with the policy direction in other big bond markets.

“There is, I think, a path to fiscal consolidation. I don’t see that in France or the US,” said Luca Paolini, chief strategist at Pictet Asset Management.

Gilts have also been supported by trader bets that the Bank of England will make a quarter-point interest rate cut by February, sooner than they had been expecting before data showing slowing private sector wage growth and rising unemployment.

Government bonds around the world have rallied in recent days on concerns over parts of the US credit market, also knocking stocks.

Europe’s Stoxx 600 index was down 1.6 per cent on Friday, while US futures were also lower, implying a 1 per cent fall for the blue-chip S&P 500 stock index when trading opens later.

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