AXA Investment Managers moved quickly on Friday, cutting its exposure to UK government bonds by half in several portfolios after the government confirmed it would not raise income tax—an announcement that caught markets off guard and drove borrowing costs sharply higher. The adjustment comes ahead of the upcoming budget, with AXA’s senior portfolio manager Nicolas Trindade signalling increased uncertainty around the credibility of the fiscal outlook.
Before the tax shift, AXA had been overweight UK bonds in its global strategy. Trindade now holds a neutral position aligned with benchmark indexes, citing discomfort heading into the next fiscal announcement. He expects finance minister Rachel Reeves to adhere to her fiscal rules, although the absence of an income tax increase means the government’s fiscal headroom is likely closer to £15 billion, rather than the £20 billion many investors believed necessary.
Despite the market volatility, several major asset managers—including Royal London Asset Management, Allianz Global Investors, and Fidelity International—continue to favour British gilts. They argue that moderating inflation and the likelihood of further Bank of England interest rate cuts strengthen the long-term appeal of UK government debt.
Royal London’s Ben Nicholl noted that the chancellor’s credibility is again being questioned, yet he took advantage of Friday’s selloff to buy 5-year and 30-year gilts, favouring short-duration bonds on expectations that the BoE will ease policy sooner than markets anticipate.
At Allianz Global Investors, portfolio manager Ranjiv Mann maintains a preference for gilts over U.S. Treasuries, even after trimming risk earlier in the month as budget optimism became priced in. Mann believes the government will ultimately follow through with fiscal consolidation, and recent gilt price action shows markets are prepared to enforce discipline on policymakers if necessary.
As fiscal strategy, credibility, and interest rate expectations continue to diverge, UK gilt markets remain a focal point for global investors assessing macro risk—and potential opportunity—heading into the next policy cycle.