Volatility Strikes UK Bonds Amid Labour's Budget Moves

British government borrowing costs experienced a significant weekly rise as Labour's tax-and-spend budget lifted inflation expectations, affecting investors' rate cut predictions. Gilt yields surged, prompting mixed reactions from institutional investors. Concerns linger over global rates due to upcoming U.S. elections and revised UK growth projections.

In a tumultuous week for the UK financial markets, short-term government borrowing costs saw their largest weekly rise in over a year. This surge comes on the heels of Labour's tax-and-spend budget, which has heightened inflation expectations and shaken confidence in upcoming rate cuts.

Yields on two-year gilts rose dramatically, eclipsing levels not seen since June 2023, while benchmark 10-year yields also climbed significantly before settling down by week's end. The pound, meanwhile, struggled through its longest streak of weekly losses in six years.

The financial market's reaction, though large, fell short of the chaos following unfunded tax cuts in 2022. Still, some investors have shifted positions, with BNP Paribas and Artemis reducing gilt holdings. Opportunities remain, as Lazard and AXA suggest higher yields present buying potential, despite global uncertainties exacerbated by the looming U.S. elections.

(With inputs from agencies.)