The Chancellor hit many of the bases gilt investors were hoping for. Fiscal headroom has been raised by more than expected, the OBR forecasts look credible, and the Chancellor’s measures were disinflationary, allowing the BoE to proceed with cutting Bank Rate. 

Revenue raising is more back-loaded than we would ideally prefer, but not drastically so. Most importantly, additional gilt supply this fiscal year is negligible (£4.6bn), and there is even a reduction in long-dated gilt issuance. 

Now that the Budget fog has lifted and the Chancellor has not put any speed bumps in the way of the disinflationary process, the BoE can move ahead with cutting Bank Rate, and we expect gilt yields to fall in the future. 

The gilt market reacted very positively, especially to the favourable revised gilt sales numbers. This should be viewed in the context of the significant rally in gilts during the eight-week run-up to the Budget. Gilts also outperformed swaps, particularly at the long end. Finally, GBP rose 0.3% on the day, despite falling yields, suggesting that investors were rather pleased with the announcements.  

Ahead of the Budget, we identified six key features that gilt investors were monitoring to assess whether the Budget would be viewed favourably. Here’s how the Chancellor’s announcements measured up: 

• Fiscal rules need to be met; headroom restored at £9.9bn or possibly increased. Fiscal headroom was more than doubled to £22bn, far exceeding market expectations of approximately £15bn. In addition, the Chancellor announced that fiscal rules will only be assessed once a year, meaning we will not face this fiscal uncertainty in the Spring.  
• Issuance in the current fiscal year and across the forecast horizon should not rise meaningfully. Gilt issuance for FY 2025/26 was increased by £4.6bn - lower than the approximately £10bn investors were expecting. In addition, details on long-maturity gilts and linker issuance were very favourable. Long-maturity gilt supply was cut by £1.1bn, with two outstanding auctions cancelled. Two linker auctions were cancelled as expected, but the cancellation of the final syndication was a surprise. 
• The OBR's reduction in productivity assumptions - and hence GDP growth forecasts - should be seen as credible. As expected, they reduced the central forecast for the underlying rate of productivity growth in the medium term to 1.0%, 0.3pp slower than in the March forecast. As a result, the OBR growth forecasts are more aligned with the BoE and professional forecasters, making future revenue and debt estimates (often compared to GDP) more credible. 
• Measures undertaken should not be seen as inflationary. The OBR scored Chancellor Reeves’ policy measures as reducing 2026 inflation by 0.3pp. This aligns with market expectations and should not delay the BoE’s plans. The market is pricing in a 93% probability of a 25bp cut in December, slightly higher than before the Budget. Terminal rate estimates for this cycle are now expected to be 3.35%, very similar to pre-Budget pricing. 
• Revenue-raising measures need to be seen as credible and not entirely back-loaded. This was less favourable. Borrowing in FY 2025/26 is expected to be £21bn (0.7% of GDP) higher, but still lower by £6bn (0.2% of GDP) in 2029-30. Hence, more decisive action to meet the fiscal rule occurs later in the projections and therefore may not materialise. 
• The Budget announcements should boost political stability. Unfortunately, a politically popular and gilt-friendly Budget is a circle that is hard to square. A manifesto breach was avoided, and it appears there are few unwelcome policy changes. Let’s see how it settles with the Parliamentary Labour Party and the public in general. 

With fiscal headroom restored and issuance contained, the stage is set for lower gilt yields as the BoE moves ahead with rate cuts. 

Key budget measures: 

• Freezing personal tax and employer National Insurance contributions Thresholds for three years from 2028-29 (+£8.0bn) 
• Charging NICs on salary-sacrificed pensions contributions (+£4.7bn) 
• Increasing the tax rates on dividends, property, and savings income by 2% (+£2.1bn) 
• A reduction to the writing down allowance main rate in corporation tax (+£1.5bn) 
• The two-child benefit cap will be removed within universal credit 
• A new mileage-based charge on battery electric and plug-in hybrid cars from April 2028 (+£1.4bn) 
• Reforms to the taxation of gambling (+£1.1bn) 
• Reduced capital gains tax relief on disposals to employee ownership trusts (+£0.9bn) 
• A high value council tax surcharge on properties worth over £2mn     
• Tax administration, compliance and debt collection measures (+£2.3bn) 
• A freeze to fuel duty for a further five months followed by staged increases from September 2026 (–£2.4bn next year) 
• A range of other tax measures, including the introduction of the of the Sizewell c regulated asset base levy (+£4.4bn)