Insights 
VT 
UK gilts stabilised after a previous selloff, with 10-year yields decreasing by nearly 9 basis points to 4.52%. The recent selloff was influenced by concerns over the UK’s fiscal direction, particularly affecting Rachel Reeves.
During Prime Minister’s Questions, Reeves faced intense scrutiny, leading to emotional displays and prompting Prime Minister Starmer to publicly support her. Starmer reiterated his full backing for Reeves and underscored adherence to fiscal rules.
Impact Of Fiscal Policies
Whether this is the optimal policy approach for the UK remains uncertain. However, it appears to have prevented a repeat of the Truss mini-budget scenario. Meanwhile, the British pound is relatively stable, with the exchange rate at 1.3655.
Gilts appear to have found a tentative footing again, with the recent decline in yields suggesting less immediate pressure from bond markets. The sharp retreat in 10-year yields—falling close to nine basis points—reflects a shift in sentiment following an earlier wave of selling. That earlier pressure came on the back of doubts surrounding the UK’s fiscal direction.
Reeves was at the centre of public and parliamentary attention, with opposition figures questioning both her spending commitments and her ability to stick to financial rules. Emotions were clearly running high during the debate, which added to the feeling of uncertainty among market participants. Though not directly addressed in policy terms, the implicit support offered by Starmer suggested an internal commitment to keeping market confidence steady, even if criticism remained loud. His reiteration of fiscal discipline came across as a message not just to political observers, but to the financial community more broadly.
While Starmer’s reassurances do not offer a guarantee of market calm, we can infer from recent price action in gilts that markets have accepted this stated commitment to rules-based management, at least for now. Any hint of deviation from that message could reignite volatility, particularly given how raw memories are of last year’s rapid surge in yields.
Market Reactions
On the currency front, the pound has been much more stable than long-dated bonds, holding at 1.3655 against the dollar. That level implies relatively balanced market expectations. No alarm bells are currently ringing from the FX side, which tends to react more dramatically when fiscal policy is seen as inconsistent or unsupported by monetary policy. However, currency markets are typically quicker to shift when sentiment turns, and traders should note that they often act as an early warning signal when confidence erodes.
From a trading standpoint, the short-term trajectory of derivatives linked to rates and currencies will depend heavily on any deviation from current fiscal messaging. There’s also heightened sensitivity to upcoming announcements from both Treasury and central bank officials. In other words, it may not take much to alter expectations violently should policymakers appear divided or unclear.
Volatility projections for interest rate products have come off their highs but remain stretched compared to year-to-date averages. That suggests many market participants are keeping optionality open through swaps and options, anticipating that clarity on fiscal plans might be fleeting. Accordingly, we maintain slight preference for strategies that allow for tail-risk moves in gilts, particularly at longer maturities, where sentiment has proven fragile before.
Directionally, flows have swung back in favour of gilts, especially in the 10-year sector. But the consistency of those flows will matter more in the coming days than the scale. If buying starts to look forced—driven by technicals rather than conviction—market reaction could prove asymmetric.
We note spreads between UK and German yields are still wider than average, which implies lingering risk premium. That can be interpreted as cautious optimism at best. Meanwhile, forward curves in sterling swap markets are showing a flatter profile, indicating markets expect restraint in future hikes from the Bank of England.
Risk appetite, however, is still tempered. Positioning data indicates only modest inflows into leveraged interest rate products, and not enough yet to suggest widespread belief in a settled fiscal narrative. There may be room for tactical entrants, but not without carefully managing downside exposure.
Looking ahead, there is a clear focus on the upcoming Autumn Statement. Any hint of divergence between headline rhetoric and budget details should be watched more closely than usual. Based on past reactions, fiscal ambiguity will be met with a rapid repricing of long-end derivatives.
We are treating any increased exposure as tactical for now, and remain hedged on duration.
