As the UK awaits Chancellor Rachel Reeves' update on fund allocations, gilt yields have edged higher, indicating market anxiety regarding potential tax increases or borrowing. While no new spending is anticipated, the discussions during the spending review highlight the UK’s strained public finances. A rally in gilt yields soon after the review's release was sparked by a lower-than-expected CPI print in the US, suggesting a strong correlation between UK gilts and US treasuries amidst ongoing fiscal concerns.
An increase in taxes may be seen as more 'market friendly', but would be politically damaging, while an increase in borrowing would put further pressure on already elevated gilt yields. The rally in gilt yields had nothing to do with the spending review but came on the back of a lower-than-expected CPI print in the US.
Markets remain nervous about the potential for either higher taxes or an increase in borrowing in the future, particularly given the focus on strained public finances.
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