No festive cheer like policy uncertainty
The UK budget delivered surprises and a stronger fiscal position, but uncertainty remains. We prefer to stay nimble and liquid as year-end brings volatility.
The UK market has been anything but dull this month—think of it as a Shakespearean drama with surprise plot twists. The much-anticipated UK budget on 26 November, teased longer than a season finale. Headlines had swung between “tax hikes incoming” and “tax cuts for all”. Now, with the details in hand, the narrative is shifting.
OK, not bad
The budget looked better than expected: the fiscal buffer was doubled to just under £22 billion from £10 billion in March. This stronger position suggests fiscal tightening measures that could help lower inflation, raising the chances of the Bank of England cutting rates, though timing remains uncertain as some measures will take effect later, leaving questions about credibility. Adding drama, the Office for Budget Responsibility accidentally published its assessment early—someone’s definitely in hot water!
Markets reacted: UK gilt yields eased, with the 10-year yield slightly lower at the time of this writing. Rate cut expectations remain largely unchanged, but the tone feels less tense. If the budget delivers on its promises, it could pave the way for a disinflationary impulse and give the Bank of England room to maneuver.
The sterling curve remains tricky, with positioning complicated by the upcoming Bank of England meeting on December 18—just in time for the holiday season, because nothing says festive cheer like monetary policy uncertainty. Recent data has leaned soft: retail sales disappointed, PMIs were lower, and rhetoric around a potential cut has picked up.
Still, the credibility of Wednesday’s budget will set the tone. A well-received package could reinforce rate-cut expectations; a messy implementation could send gilt yields climbing faster than a squirrel up a tree.
Boring is beautiful
Stay nimble: Think of it as wearing running shoes to a dance party. Liquidity is king heading into year-end, so we’re maintaining a conservative stance while selectively adding duration where value emerges. Weighted average maturity (WAM) remains short, and flexibility is key: we can extend if the curve rewards us post-budget clarity. Until then, we’re prioritizing high-quality issuers and short-dated instruments, because in uncertain times, boring is beautiful.
We’re steering clear of unnecessary credit risk and focusing on instruments that keep the fund agile. The market chatter may sound dramatic, but we prefer an approach that is calm and calculated—like a British queue, orderly even under pressure. Year-end funding dynamics could add some spice, so we’re prepared to act quickly if spreads widen or opportunities arise—flexibility remains the ultimate superpower.