UK budget misfire widens credibility gap as gilt yields hit 25-year highs

Lale Akoner, Global Market Analyst at eToro says: “The latest UK Budget widened the credibility gap. Borrowing is already £11bn above forecast this year, sending gilt yields to highs last seen in the late 1990s and pushing sterling lower. We think that investors aren’t just reacting to global bond moves, but they’re actively demanding a higher risk premium for UK debt. With fewer natural buyers of long gilts and no clear path to stabilising debt dynamics, volatility is sharper, leaving the market highly sensitive to political signals.

“Until the Chancellor pairs pro-growth measures with credible offsets, the risk premium will stay and so will the dispersion across assets. For retail investors, there are a few implications. Sterling weakness may cushion FTSE 100 earnings but tighten domestic financial conditions, putting pressure on mid-sized UK businesses and property markets that rely on cheap credit. Some high-quality bonds that pay solid yields could benefit if rates eventually come down, but the key here is not to overdo it, since government overspending could keep long-term borrowing costs high.

“Overall, markets demand discipline. Without a credible fiscal fix, a mix of tax rises and spending cuts, the UK’s risk premium may persist: both a warning and an opportunity for investors with a long term view.”