A £750bn fund manager has cut its exposure to UK government bonds following Rachel Reeves’s volte-face on income tax which sent financial markets into disarray.
Axa Investment Managers said it has reduced the amount of long-dated UK gilts it holds in its fixed-income portfolios, warning it was “much less comfortable going into the Budget”.
The yield on 10-year UK gilts – a benchmark for the cost of servicing the national debt – rose by 0.137 percentage points to 4.57pc on Friday after it emerged that the Chancellor had abandoned plans to raise income tax.
It marked the sharpest one-day rise in government borrowing costs since Ms Reeves was pictured crying in the House of Commons in July.
Nicolas Trindade, a senior portfolio manager at Axa, which has assets under management worth more than €465bn (£410bn), said: “That came as a surprise to us. I think it came as a surprise to the market.
“She did a press conference earlier in the week, very clearly to prepare the market and prepare the British people [for higher income tax]… But she decided just not to go through with it and go for smaller tax increases, which I think is a lot less credible than going for income tax.”
Ms Reeves is struggling to retain credibility with the bond markets, with investors accusing her of “flying kites” and “flip-flopping” ahead of the Budget.
They have sold off UK government bonds, or gilts. The falling gilt prices have caused a spike in the yields, which represent the interest rate that the British Government must pay to borrow money.
Having been “overweight” in UK government bonds, Axa on Friday shifted to a “neutral” stance by in effect selling long-term bonds and buying shorter-duration ones. Short-term debt protects investors’ money from falling bond prices and rising interest rates.
On Monday, the yield on 10-year gilts jumped again, before settling near 4.53pc. However, it still marks the highest level since mid-October, when traders began buying bonds – pushing down the yield – on expectations Ms Reeves would raise taxes to plug a black hole in the country’s finances.
Mr Trindade added: “From a fiscal perspective, it would have made a lot of sense to increase income tax, because that would have been a clean way to do it, it would have been a credible way to do it.
“It would have meant short-term pain, because obviously that would have had a negative impact on growth.
“But I think that would have been for longer-term gain, because it would have given space for the Bank of England to cut interest rates more aggressively over the course of 2026, and therefore lower the level of gilt yields.”
