Bond Watch: two takeaways from how bond markets barely moved after Budget 2024

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   

Bond markets hardly budged after Chancellor Jeremy Hunt’s Spring Budget.   

He announced a 2p cut to National Insurance (from 10% to 8%), which will benefit workers but not pensioners, as well as a £5,000 British ISA and an increase to the threshold where child benefits are withdrawn for higher earners.  

The 2p cut is in addition to a 2p introduced at the start of the year. The chancellor claims the combined reduction will save the average employed worker £900 a year. 

He funded this with a continued freeze to the personal allowance, set to stay at £12,570 for another four years, and a phasing out the nom-domiciled tax status, so that tax is paid on all earnings after four years for people not domiciled in the UK.  

The subdued reaction from bond markets tells us two things: first that most of the major tax changes were expected, and second that they will not have an overall inflationary impact that will cause the Bank of England to keep interest rates higher for longer. 

Hunt said that the Office for Budget Responsibility (OBR) expects inflation to fall to 2% by the autumn.   

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Calculations from interactive investor show that the tax burden is still increasing for many, which will relieve inflationary pressures.  

Myron Jobson, senior personal finance analyst, says that once fiscal drag is factored, both the lowest and highest earners still face a higher tax burden: an extra tax burden of £81 for someone on £20,000 and £1,064 for someone on £100,000. 

This is based on an OBR inflation forecast of 6.1% for the current tax year (2023-24) and the uprating of income tax threshold by the same percentage. 

Jobson says: “While most taxpayers will benefit from the NI cut, those on the opposite ends of the income spectrum would see the complete nullification of the benefit due to fiscal drag. Someone currently earning £20,000 would lose £81 due to extra tax by in the next tax year as more and more of their income is taxed at a higher rate, rising to £1,064 for someone on £100,000, compared to if thresholds rose with inflation.”