The UK budget has gained market recognition, with British bond yields falling. Vanguard and RLAM and other giants have entered the market and increased their positions.

On Wednesday, Vanguard Group and Royal London Asset Management (RLAM) purchased UK government bonds. Chancellor of the Exchequer Rishi Sunak's budget plan was largely well-received by the market, leading to the biggest increase in long-term UK bond prices since April. Like many peers, Vanguard Group's international interest rates manager Ales Koutny had reduced the amount of UK government bonds held before the budget announcement, expecting increased market volatility. However, he stated that after Sunak's statement on raising taxes and strengthening the UK's fiscal position, he resumed buying 30-year bonds on Wednesday. He noted that given the current prices were too bearish, he might further increase investment allocation. Koutny said in an interview, "The budget did not have a significant impact on the UK's fragile fiscal situation. But the market still attached an overly high risk premium to the country." The 30-year UK government bonds, more sensitive to economic prospects, led the bond market's rise on Wednesday. Its yield dropped by 12 basis points, the biggest single-day decline since April (also the peak of the trade tariff conflict). But the initial market reaction was unclear: initially, UK bond prices rose and then fell after the UK fiscal oversight agency mistakenly released forecasts; subsequently, Sunak presented the relevant plan to parliament. RLAM's head of rates and cash business, Craig Inches, took advantage of this volatility, selling bonds when prices rose and buying back when prices fell. He held long-term positions in UK government bonds across various funds. RLAM anticipated that strict tax policies would burden households, inhibit economic growth, create conditions for further interest rate cuts by the Bank of England, and also bring positive impacts to the bond market. Inches also noted that Sunak had benefited from the Debt Management Office's cautious issuance strategy this year. This strategy allowed for the cancellation of some bond auctions, further boosting long-term bond prices on Wednesday. Inches explained, "We won't have sufficient supply of long-term bonds until April 2026. So if the UK economy starts to recover, there may be a shortage of long-term bond supply. Get in there quickly!" Following policy leaks and significant adjustments to income tax hike proposals, Sunak stated that the government would adopt a more cautious borrowing strategy. As investors carefully scrutinized the budget details, the conclusion was drawn that a series of tax hikes and spending commitments allowed Sunak to increase a key cash reserve. This made the UK government's position in the bond market relatively more stable, reducing the necessity for further tax increase plans next year. On Wednesday, the pound sterling rose above $1.32 against the US dollar, bond prices also rose, with the 10-year UK government bond yield falling for the fifth consecutive day to 4.42%. Leading UK banks propelled the FTSE 100 index up by 1%. Jordan Rochester, head of macro strategy at MUFG Bank in London, said, "For us, it's about the numbers rather than the specific events. It seems the market's risk response to this event is fairly decent." The bank advised clients to "reinvest in UK government bonds" after the budget announcement. The rise in UK bond prices on Wednesday signaled the end of the upward trend in UK bond yields. On September 3, when Sunak announced the budget date, the yield on 30-year UK government bonds hit its highest level since 1998. Since that peak, the yield has fallen by over 50 basis points, with this rise also benefiting from market expectations of a larger-than-expected interest rate cut by the Bank of England. Fiscal buffer far exceeds expectations Traders focused on the UK government's fiscal buffer - essentially a measure of the range of actions Sunak can take before violating the government's self-imposed rules. The government led by Prime Minister Keir Starmer has set two fiscal rules aimed at garnering support from bond investors. The most important is what Sunak calls the "stability" rule: daily government spending should be covered by tax revenue from the fiscal year 2029-2030. In addition to revealing an unexpectedly large buffer of 220 billion, the Office for Budget Responsibility in the UK also downgraded its economic growth forecasts to reflect lower productivity assumptions, while predicting an increase in inflation rates and stronger wage growth. Analysts pointed out that the expanding fiscal buffer in the UK will shield UK government bonds from some of the worst-case scenarios traders may have imagined before the budget announcement. This buffer is much larger than expected by the market, providing enough room for the UK government to handle any unexpected revenue situations, which is good news for the risk premium set by investors on UK assets. The principle is that borrowing is only used for investment. Sunak had reserved only 99 billion in buffer funds in March (basically a backup cash she can withdraw without violating regulations), but this amount has now significantly increased, far exceeding the average estimate of 150 billion. It is certain that this delayed fiscal austerity policy has raised doubts about the credibility of Sunak's plan. The UK government is trying to strike a balance between bondholders' demands for fiscal prudence and the political reality this year of lawmakers opposing spending cuts. However, despite these concerns, the market's positive reaction on Wednesday suggests that investors are more optimistic about the UK's fiscal trajectory than before. Gordon Shannon, fund manager at TwentyFour Asset Management, said, "Positions have been adjusted, the UK's anti-inflation trend has continued due to lower energy costs, and there have been no significant surprises in borrowing or issuance, which also helped alleviate market tension. From a more severe perspective, Sunak's budget plan could potentially pose downward pressure on the UK bond yields in the medium term." The rise in UK bond prices on Wednesday marked the end of the trend of rising UK bond yields. On September 3, the day Sunak announced the budget plan, the 30-year UK government bond yield reached its highest level since 1998. Since that peak, the yield has fallen by over 50 basis points, with this rise also benefiting from market expectations of a significant interest rate cut by the Bank of England. --- Note: The translation provided is a lengthy one, as the original text was detailed and substantial. 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