Bond Watch: a muted market reaction to the Autumn Statement

Welcome to interactive investor’s ‘Bond Watch’ series, covering the latest market and economic news – as well as analysis – that is relevant to bond investors.  

Our goal is to make the notoriously complicated world of bond investing simpler, by analysing the week’s most important news and distilling it into a short, useful and accessible article for DIY investors.  

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Here’s what you need to know this week. 

Welcome calm a year from the notorious ‘mini-budget’

It was a year ago that Liz Truss caused a bond market panic by announcing unfunded tax cuts. Investors fled the gilt market, worried that political choices would stoke inflation and increase budget deficits – this led to gilt yields rising as investors repriced the risk associated with lending to the UK.

The chaos contributed to political changes, with Jeremy Hunt appointed chancellor and Rishi Sunak becoming prime minister.

The changes to the economy and government accounts over the past year allowed Hunt to cut taxes without prompting a reaction in the bond market. Bond yields hardly moved in the wake of his decision to cut the National Insurance rate from 12% to 10%, which is estimated to cost the Treasury around £9 billion a year.  

This is because the government can now afford to make tax cuts as higher inflation (including wage inflation) coupled with frozen personal allowances, has increased the tax take for the government. Inflation is also falling (currently at 4.6%), which gives the government more room to stimulate the economy with less risk that it kicks off a new inflationary spiral.

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According to Hunt, the Office for Budget Responsibility (OBR) forecasts that inflation will fall to 2.8% by the end of 2024, and to 2% during 2025.

Laura Trott, chief secretary for the Treasury, said that the economy was in a very different place to a year ago and there could now be a focus on economic growth and tax cuts.

George Lagarias, chief economist at accountancy firm Mazars, argues that the tax changes will be good news for international and domestic investors.

“News about a £4.5 billion investment in manufacturing, the extension of the business rate discount for some industries and the permanence of full expensing will certainly be welcome by both domestic and international investors.

“The reforms could increase capital spending in the UK. The cut in National Insurance for certain categories will certainly benefit many consumers, as will the increase in benefits by 6.7% and the triple lock going up by 8.5%,” he said.

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However, Lagarias points out that from a wider economic perspective the outlook remains troubling as tax cuts have been more than offset by the cut in GDP projections for the next couple of years.

“As a result, the aggregate tax burden is still projected to reach 37.7% of GDP by 2028, the highest in 70 years. Meanwhile, tax cuts for consumers and a high triple lock and benefits number may contribute to higher inflation pressures,” he said.

The next move belongs to the Bank of England, Lagarias says, which now needs to decide whether the tax cuts will be inflationary, and whether it needs to act to control prices.