For all the nervous anticipation surrounding Wednesday’s UK budget, Westminster managed to pull off something British governments have found remarkably difficult in recent years: getting through a major fiscal announcement without sending the gilt market into a tailspin.

Bloomberg macro strategist Simon White notes that UK risk spreads have retreated to almost their lowest levels in six years, a rather impressive response to a budget that was deliberately designed to avoid upsetting anyone with a Bloomberg terminal.

Takeaways by Dark Side of the Boom™

• Britain’s deliberately uneventful budget has given investors some welcome relief, with UK financial risk spreads retreating toward their lowest levels in six years. Sometimes doing less is precisely what the bond market wants.

• Bloomberg’s Simon White finds that the UK’s composite financial risk monitor has been lower on only two brief occasions since 2020, suggesting investors are increasingly comfortable with Britain’s immediate fiscal outlook.

• The UK has recorded the largest decline in estimated term premium among major developed bond markets since yields peaked around October 8, signalling reduced investor anxiety about holding longer-dated gilts.

• Easing inflation indicators could allow the Bank of England to deliver fewer rate hikes than currently expected, potentially relieving further pressure on gilt yields. But Britain’s structural fiscal problems remain unresolved.

Has Westminster finally earned a little breathing room from the bond vigilantes, or is the market simply enjoying a temporary holiday from Britain’s uncomfortable fiscal arithmetic?

Britain Buys Some Breathing Room

The government’s strategy was essentially to keep the boat steady, postpone the politically awkward decisions and hope the bond market appreciated the restraint. Compared with the previous two budgets, the net fiscal impact was considerably smaller, and investors appear to have welcomed the absence of another fiscal adventure.

That does not mean Britain’s public finances have suddenly become a picture of health. The structural problems remain, and difficult decisions have largely been pushed further down the road. But after years of fiscal surprises and gilt market tantrums, there is something to be said for a government that manages to leave well enough alone.

White’s UK risk monitor, which combines gilt spreads, asset swap spreads, bank and sovereign credit default swaps, sterling and equity performance, offers a striking illustration. The composite measure has been lower on only two brief occasions since 2020.

For a country whose financial markets have become accustomed to treating budget announcements as potential volatility events, that represents a meaningful improvement in sentiment.

The more interesting development, however, is taking place in the bond market itself, where the improvement extends beyond the immediate relief surrounding the budget.

Since global yields peaked around October 8, the subsequent decline has been driven almost entirely by falling term premia, the additional compensation investors demand for holding longer-dated government debt.

And Britain has enjoyed the largest decline in estimated term premium among the major developed bond markets, according to White’s real-time, yield-curve-based measure.

That is worth paying attention to. Investors are effectively demanding less compensation for the uncertainty surrounding long-term British government borrowing, even though the fiscal challenges have hardly disappeared. The market seems prepared to give Westminster the benefit of the doubt, at least until the next political or budgetary surprise arrives.

There is another important implication here, particularly for the Bank of England. Gilt yields remain elevated, but with less of the yield attributable to term premium and more reflecting expectations for short-term interest rates, the BoE has greater influence over the direction of borrowing costs.

And that could become increasingly relevant if Britain’s inflation outlook continues to soften.

White notes that leading indicators of UK inflation are easing, potentially leaving the Bank of England with less tightening to deliver than markets currently anticipate. If that proves correct, a repricing of the policy path could take additional pressure off longer-dated gilts without requiring investors to make another heroic leap of faith about Britain’s fiscal prospects.

For sterling, gilts and UK equities, the immediate message is that a substantial amount of fiscal anxiety has been taken out of market pricing. The budget may have lacked ambition, but investors were hardly demanding a grand economic transformation. They wanted predictability, limited additional borrowing and, above all, no nasty surprises.

There is a delicious irony in that. After years of governments trying to impress markets with bold fiscal promises, Britain has discovered that the most effective way to calm investors may simply be to do very little.

Of course, a shrinking risk premium is not a certificate of fiscal rehabilitation. Britain’s underlying budget problems still require difficult political choices, and postponing them does not make the arithmetic disappear. But markets trade changes in risk as much as absolute levels, and for now the direction is encouraging.

The UK has bought itself some breathing room. Whether Westminster eventually uses it to repair the public finances or simply enjoys the respite is a question for another budget.

For the moment, the gilt market appears content to put away the pitchforks.