Gilt rally gives the Chancellor a small reprieve ahead of Autumn Budget

Gilt rally gives the Chancellor a small reprieve ahead of Autumn Budget

11 Nov 2025

Long-term UK borrowing costs have dropped from stubborn highs as the 20-year gilt yield fell back by 0.3%pa over the month, finishing just above 5%pa. 

Better than expected UK inflation figures triggered a rally in the gilt market, which has eased some pressure on Chancellor Rachel Reeves ahead of the Autumn Budget, as she fights to close the fiscal spending gap.

Read our Investment Monthly Briefing here

---

October has set the scene for the Chancellor ahead of her Autumn Budget. Gilt yields have been belligerently high in recent months, elevated in part by a downgrade to UK productivity, which has constrained Reeves’ ability to close the fiscal spending gap (the difference between public spending and tax receipts). However, new inflation data was lower than anticipated as 12-month CPI stood at 3.8% in September, 0.2% lower than expectations. The Bank of England subsequently held the bank rate at 4% in their early November meeting. Falling gilt yields in October have reduced the implied cost of government borrowing by up to £3bn as the Chancellor looks to turn the Budget deficit into a surplus by 2030. A weakening labour market and higher than target inflation mean that the Chancellor is still likely to look for ways to both raise taxes and reduce public spending.

In a widely anticipated move, the Federal Reserve (Fed) cut its main lending rate by a quarter percentage point to a range of 3.75% to 4.00% in late October. However, amidst a waning labour market and a halt to their quantitative tightening, Fed Chair Jay Powell released a dovish statement that a rate cut in December was not a certainty. The probability of a third rate cut in 2025 subsequently fell from 87% to 74%. The European Central Bank (ECB) kept rates steady for a third consecutive meeting at 2% in October. The news comes as Eurozone inflation had risen to 2.2% in September but then dropped to 2.1% in October.

Oil prices experienced a volatile month, falling to a five-month low as the market was hit with concerns of oversupply. Brent Crude oil prices initially dropped 3% to $61.50 per barrel in mid-October, with a projected surplus of 3.2 million barrels a day from October to June 2026, far greater than the expected. American sanctions on Russian oil resulted in a turnaround as Brent Crude then soared 9% from its October low after President Trump’s announcements.

Tensions between two of the largest trading nations in the world heightened again in October as China announced strict export controls on rare earth materials. In retaliation, Trump looked set to impose 100% levies on all Chinese imports from November. Before additional tariffs could be imposed, the two sides agreed to a one-year truce, but the outcome serves as a strong reminder of China’s negotiating power against its biggest rival trading nation.

Equity markets experienced a positive month with global equities delivering 4.7% and emerging markets returning 4.4%. Despite record breaking performance of late, gold suffered a steep correction as it plummeted 9% from its peak, having reached almost $4,400 per troy ounce in mid October. Corporate bond spreads continue to tighten both in the UK and globally. The strong returns on fixed interest gilts outperformed those of their index linked counterparts owing to a reduction in future inflation expectations over the month.

Funding levels remained resilient with positive returns for major growth asset classes offsetting most of the negative impact of falling gilt yields on aggregate UK DB pension scheme funding over October.

Find out more

For further information, please get in touch with Matthieu Michaux or speak to your usual XPS Group contact.

Important information: Please note the information and opinions expressed herein do not take into account the circumstances of individual pension funds and accordingly may not be representative of the circumstances affecting your fund. This note, and the work undertaken to produce it, is compliant with TAS 100, set by the Financial Reporting Council. No other TASs apply. The note has been written on the basis that decisions will not be based on its contents. Appropriate advice should be obtained before any decisions are made. The information expressed is provided in good faith and has been prepared using sources considered to be reasonable and appropriate. While information from third parties is believed to be reliable, no representations, guarantees or warranties are made as to the accuracy of information presented, and no responsibility or liability can be accepted for any error, omission or inaccuracy in respect of this. This webpage may also include our views and expectations, which cannot be taken as fact. The value of investments and the income from them can go down as well as up as a result of market and currency fluctuations and investors may not get back the amount invested. Past performance is not necessarily a guide to future returns. The views set out in this document are intentionally broad market views and are not intended to constitute investment advice as they do not take into account any client’s particular circumstances.

Please note that all material produced by XPS Investment is directed at, and intended solely for the consideration of, professional clients within the meaning of the Financial Services and Markets Act 2000 (FSMA). Retail or other clients must not place any reliance upon the contents.