UK bonds rally as pound softens after Reeves vows to stabilise public finances

British government borrowing costs have fallen noticeably, while sterling weakened, as Chancellor Rachel Reeves unveiled a steadfast commitment to fiscal stability ahead of the upcoming budget. Investors flocked to gilts following Reeves’s pre-budget address, where she reaffirmed her “iron clad” promise to adhere to strict fiscal rules and assist efforts to curb inflation and interest rates.

Tuesday saw gilts emerge as the strongest performers in the global government bond market. The yield on two-year gilts slipped by 0.06 percentage points to 3.78 per cent, nearing a thirteen-month low. Ten-year gilt yields, widely seen as a benchmark for the government’s debt servicing expenses, declined by 0.07 points to 4.42 per cent. Lower yields indicate rising demand and prices for these bonds among investors.

Reeves made it clear in Downing Street that her approach relies on transparency, dismissing calls for “accounting tricks” or flexible interpretations of fiscal targets. She directly addressed critics who had suggested reclassifying existing spending such as defence or education to sidestep budget constraints, stressing that there are real limits to what markets are willing to finance.

Recent hints from the Chancellor regarding a stronger fiscal buffer, efforts at lowering inflation and potential tax increases to cover a £20 billion to £30 billion shortfall have all contributed to positive market sentiment towards gilts. Investors believe Reeves’s determination to manage borrowing has reassured bondholders ahead of the budget set for 26 November.

Expectations that a tighter fiscal stance will allow the Bank of England to ease monetary policy triggered weakness in the currency markets. The pound fell 0.6 per cent against the dollar to $1.31, its lowest since April, and declined 0.35 per cent against the euro to €1.14, matching levels last seen in May 2024.

Analysts such as Matthew Amis, Investment Director at Aberdeen Investments, noted that Reeves has delivered the “right comforting words” to placate bond markets whilst steering a steady financial policy path. Many investors and economists are now focused on the forthcoming budget, keen to see how the government translates fiscal discipline into detailed policy measures.