UK government bonds, or gilts, outperformed other major sovereign debt markets following the release of Chancellor John Healey’s first budget on Wednesday, signalling investor approval of the government’s restrained borrowing plans. Ten-year gilt yields declined by up to 0.05 percentage points, settling at 5.31%, while 30-year bond yields also fell by around 0.04 percentage points. In contrast, comparable bonds in the United States, France, and Germany experienced sell-offs, highlighting a divergence in investor sentiment.

The budget framework announced by Healey included limited increases in borrowing, aligning with market expectations and featuring a £15 billion fiscal buffer designed to ensure compliance with Labour’s fiscal rule. The Debt Management Office confirmed plans to issue an additional £4.4 billion worth of debt in the next fiscal year, bringing the total issuance to £250.6 billion, consistent with forecasters’ predictions.

Notably, the government intends to reduce reliance on longer-dated bonds, which carry higher borrowing costs locked in over extended periods, in favour of shorter-duration debt to appeal to a broader investor base. Analysts described the budget as largely uneventful but appropriate to market demands for fiscal discipline after a period of uncertainty.

“The budget was uneventful and this is exactly what the bond market wanted to see,” said James Bilson, global fixed income strategist at Schroders. He emphasised that Healey inherited a tight fiscal framework from his predecessor, contributing to what he described as a “gilt-friendly outcome.”

The budget package aims to maintain fiscal control by ensuring every policy is funded either through departmental spending cuts or tax increases. The Office for Budget Responsibility (OBR) assessed the overall fiscal impact as broadly neutral, estimating a net change equivalent to 0.02% of GDP, around £1.3 billion, by 2031.

In currency markets, the pound remained stable, trading near $1.33 against the US dollar and €1.19 against the euro, reversing a recent downward trend after four consecutive days of losses. UK equities displayed mixed performance: the FTSE 100 edged higher by 0.07% to 10,694.50, while the FTSE 250 declined by 0.31% to 24,639.26. Banking and gambling stocks notably benefited from the budget, supported by tax rises that were less severe than initially feared.

Market participants acknowledged the budget’s limited scope but viewed it as sufficient to calm jitters in gilt markets after a year marked by aggressive interest rate hikes and budgetary concerns in other major economies such as France and the US. “2027 is going to present another fiscal challenge for Healey, but today’s budget should provide enough reassurance for gilt investors heading into year-end,” said Matthew Amis, investment director at Aberdeen.

Earlier in October, UK borrowing costs reached their highest levels since 2002, with ten-year gilt yields peaking around 5.5%. However, portfolio manager Kostas Deslis at Neuberger observed that the new budget did not increase risk premiums in UK fixed income, as the OBR judged the measures to be broadly neutral. He noted the fiscal buffer was narrower than some market participants anticipated but still adequate to meet official fiscal rules.