Daiwa Comments on Tuesday's Germany Bunds, U.K. Gilts

12:32 PM EST, 11/25/2025 (MT Newswires) -- Longer-dated Bunds made gains on Thursday while German gross domestic product data showed that private consumption contracted in Q3 after the Ifo business survey suggested minimal improvement in Q4 to contrast the message of the flash PMIs, said Daiwa Capital Markets.

Gilts outperformed on Tuesday as investors positioned ahead of Wednesday's United Kingdom government Budget statement, noted the bank.

U.K.'s Finance Minister Rachel Reeves will finally set out the provisions of her Fall Budget to Parliament on Wednesday. At the very least, Reeve's announcements will be expected to draw a line under a period of heightened speculation that has weighed on sentiment and buffeted the gilt market in recent months.

But the government's current borrowing trajectory looks to be out of line with its fiscal rules. To restore compliance, the finance minister will need to tighten fiscal policy, which most estimates predict will amount to a not insignificant 30 billion pounds in FY29/30.

That partly reflects the past policy U-turns for disability benefits eligibility and pensioners' winter fuel payments, as well as the need to create space for new policies, among others, removing the two-child benefit cap. The minister is also expected to raise her fiscal 'headroom' -- to a more conservative level of 15 billion pounds by FY29/30, from 9.9 billion pounds in last year's Budget -- to minimize the chances of further speculation and another damaging fiscal tightening in a year.

However, the single largest contributor to that shortfall will be the expected downgrade to the OBR's forecast assumption for productivity growth.

Cuts to day-to-day government spending are likely to make up only a fraction of the shortfall. So, higher taxes are expected to do most of the heavy lifting, added Daiwa. Contrasting their earlier signals, the government won't look to target any of the three 'big' revenue-raisers -- which would have constituted a manifesto breach -- although the freeze on income tax thresholds will be extended to FY29/30, from FY27/28, raising a little over 10 billion pounds.

Otherwise, a series of smaller tax measures are set to be tapped. As front-run by media outlets, changes to the terms of salary sacrifice pension schemes, a form of council tax surcharge on more valuable homes and tax rises on gambling firms are teed up. Inevitably, there might also be changes to the details for inheritance and capital gains taxes. Banks, however, look set to avoid being singled out for a windfall tax, while a three-year stamp duty holiday will be offered on trades of shares of firms newly listed on the London Stock Exchange.

Small amounts of revenue will be raised from token measures such as extending the sugar tax to milk-based drinks. A pay-per-mile charge for electric vehicles (EV) is also a possibility, although with rumors that the Budget will allocate additional spending to the government's EV subsidy scheme.

Separately, plans to reduce the cash ISA limit by 40% to 12,000 pounds -- designed to direct savings towards U.K.-listed equities -- would likely have a neutral fiscal impact.

Given the relatively greater uncertainty about the extent of revenues that might be raised via such a piecemeal approach, the tax rises should ideally be introduced sooner rather than later, according to the bank. Alongside an ample increase in fiscal headroom, this might provide more reassurance to market participants about the government's commitment to fiscal sustainability.

Nevertheless, gilt issuance next fiscal year is expected to rise from a touch under 300 billion pounds in FY25/26 to somewhere between 305 billion to 315 billion pounds. However, the minister has also signaled that she will steer clear of potentially inflation-stoking measures.

Indeed, the Budget is likely to include provisions targeting the cost of living -- with measures to reduce electricity bills touted and the fuel duty freeze inevitably to be extended -- which, together with a substantive net fiscal tightening over the monetary policy horizon centered on the household, should support the case for a pre-Christmas rate cut by the Bank of England.

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