Key Takeaways
- Most fixed-income managers surveyed think the Autumn Budget won’t significantly move markets.
- A smaller budget deficit would be supportive for gilts.
- The Bank of England is expected to cut rates more sharply in 2026, likely boosting gilt prices as yields fall.
The upcoming budget is expected to tighten fiscal policy and will likely include a combination of tax increases, freezing income tax thresholds beyond 2028, and potential new property and business taxes, among others. Higher taxes and fiscal tightening will have a negative impact on GDP growth but are not perceived to have the likelihood of triggering a recession.
Most fixed-income managers we surveyed believe that the UK budget will not be a material event for markets. There is an expectation that gilt yields will fall after the budget: as higher taxes and fiscal tightening weaken economic growth, government borrowing is unlikely to increase, and the Bank of England is more likely to cut interest rates.
There is also an expectation that the pound will fall. However, managers believe that this has more or less already been priced in by markets.
How Bond Fund Managers See the Autumn Budget
The majority of fixed-income managers we surveyed have a positive view on gilts ahead of the budget. There is a widespread expectation that the budget measures announced will be disinflationary and will result in lower growth, increasing the probability of more-aggressive-than-anticipated interest rate cuts. At the same time, gilts offer compelling real yields at current levels.
Below are details of positioning and outlook of several Morningstar-rated fixed-income funds.
Fidelity MoneyBuilder Corporate Bond Fund (People Pillar rating: Above Average/Process Pillar rating: Above Average) has the view that the upcoming budget should be supportive of gilts, as higher taxes should lower growth and inflation, deficit reduction should improve policy credibility, and higher tax revenues should mean less borrowing. A disinflationary budget also increases the likelihood of a Bank of England rate cut at the December meeting. The fund holds a modestly long gilts position into year-end. A softer growth outlook is not supportive of sterling credit, however; stabilizing gilt yields at somewhat lower levels than today should provide a favorable backdrop for total returns. Ahead of the budget, UK exposure has been trimmed by reducing primarily UK-domiciled bank debt in favor of European and global GBP bank debt.
Allianz Gilt Yield Fund (People Pillar rating: Average/Process Pillar rating: Average) holds an overweight of around 0.5 years in gilts via conventional and index-linked gilts. The team’s view is that tax measures that increase the government’s revenue are positive for gilts as they will address investor concerns about fiscal sustainability. However, the managers would reduce gilts exposure in case the chancellor is unable to raise enough taxes to fill the funding gap, or if there are any inflationary tax increases.
Jupiter Strategic Bond Fund (People Pillar rating: High/Process Pillar rating: Above Average) has an overall duration of 7.7 years, with over one-third coming from UK rates in the five-year segment via swaps and in the 10-year segment though government bonds and futures. The fund also has around 20% exposure to UK credit with a preference for financials, defensive sectors such as telecommunications and supermarkets, and securitizations backed by UK pubs. The team approaches the upcoming budget with cautious optimism from a bond investor’s perspective in the belief that the government has fully acknowledged the need for a meaningful fiscal adjustment. Fiscal tightening combined with a softening labor market could provide the catalyst for the Bank of England to adopt a more accommodative policy stance and cut rates more aggressively.
Royal London UK Government Bond Fund (People Pillar rating: Above Average/Process Pillar rating: Above Average) retains an overweight in shorter maturity gilts. These are most exposed to changes in bank rate, and the team expects that UK government bonds underprice the number of rate cuts required in this cycle. They expect that the economy will continue to perform poorly as tax hikes and a weakening labor market create a negative outlook. The fund also holds an overweight in 30-year gilts versus 10- and 20-year maturity gilts, as this part of the curve should be negatively impacted by the weight of supply coming to the market.
JPM Aggregate Bond Fund (People Pillar rating: Above Average/Process Pillar rating: Above Average) has an overweight in gilts expressed in different ways. There is an outright long position at the front end of the curve as the team expects that easing inflationary pressures would allow the Bank of England to cut rates more aggressively than anticipated by the market. The fund is also long UK gilts against German bunds, reflecting the fiscal divergence between the UK—which is about to announce restrictive measures—and Germany, where expansionary measures will be implemented. The team believes that the market will welcome measures that do not only reduce inflation but also increase the headroom to provide a larger cushion against future shocks.
Invesco Global Bond Fund (UK) (People Pillar rating: Average/Process Pillar rating: Above Average) has a positive outlook for sterling duration, which accounts for 2.2 years out of its seven years’ total duration. The team believes that there is room for the Bank of England to cut rates more than the market is currently predicting. Key drivers of inflation, such as employment and wage growth, are softening. They do not anticipate a significant uptick in growth in the coming quarters, regardless of the finer points in the budget. These macroeconomic factors are key to their positive outlook.
BlueBay Global Investment-Grade Corporate Bond Fund (People Pillar rating: High/Process Pillar rating: High) has a neutral stance on gilts. The team believes that given the UK’s historically high tax burden, there is a risk that raising taxes does not lead to material revenue gains, as this impairs growth and deters wealth creation. This could increase the risk of the UK falling into recession next year, at a time when persistent inflation is constraining the Bank of England. In order to be more constructive, the team would need to see more commitment from the government to bring down spending, as the economy is not growing fast enough to finance the increased demands on health, pensions, and welfare from an ageing population.
This article is taken from the Autumn Budget 2025 preview, authored by Evangelia Gkeka.
