Britain's budget reduces uncertainty, doesn't change outlook for gilts, JPM says

By Yoruk Bahceli

LONDON, Nov 27 (Reuters) - Britain's tax-raising budget reduces near-term uncertainty, but doesn't change JPMorgan's expectations for government bond yields to rise next year, the bank's head of European rates strategy research said on Thursday.

Finance minister Rachel Reeves delivered a highly anticipated budget on Wednesday that raises taxes and doubles her margin to meet Britain’s fiscal targets, known as headroom, even as welfare spending rises.

"The near-term uncertainty around the budget and what the budget could have delivered in terms of the gilt market has been removed because headroom is bigger," Francis Diamond told Reuters, adding this would mean fiscal policy would be less sensitive to swings in borrowing costs next year.

"Over the medium term, I think there is always a difficulty... as you approach the 2029 election, whether those tax raising policies are delivering what they need to deliver," he said.

Gilt yields fell on Wednesday and investors welcomed Reeves' larger headroom but warned that the outcome of the budget is less certain as much of the tax hikes take effect later rather than sooner.

He added the tax hikes in the budget didn't change his view for the Bank of England to deliver three more rate cuts by June next year, then stay on hold at a policy rate of 3.25%, as the fiscal drag from the tax hikes is not immediate, given they mostly kick in after 2027.

Some investors had hoped before Wednesday that the fiscal tightening resulting from the budget would prompt the BoE to cut rates faster, supporting their positions that favour gilts.

Diamond said he maintained his expectation that 10-year gilt yields would rise to 4.75% by the end of 2026, from just under 4.50% currently.

He said uncertainty over local elections in May and whether they would lead to a leadership contest within the ruling Labour Party would be a factor driving yields higher in the second half of next year.