ii Bond Watch: what the Spring Statement means for you

Chancellor Rachel Reeves’ delivery of the Spring Statement on Tuesday was overshadowed by military escalation in the Middle East.  

The reception anyway was sanguine, given the update was more of an affirmation of the chancellor’s position and a selective reading of the Office for Budgetary Responsibility’s (OBR) outlook than a conduit for new policy.  

• Invest with ii: Investing in Bonds | Free Regular Investing | Open a SIPP

The week’s resurgence in gilt yields at the long end mirrored US and European government bonds - attributed to the implications of the Iran conflict rather than the chancellor’s update. 

While there were some positive developments since the Autumn Budget, Chancellor Reeves’ statement that “this government has restored economic stability” may be premature. 

The good news 

The OBR’s economic and fiscal update did bring some positive news for UK finances. 

Forecasts for public sector net borrowing as a per cent of GDP for the years to 2030-31 have been revised downwards modestly since November 2025.  

Borrowing ought to be £6 billion lower this year versus November, mostly driven by rising tax receipts (helped by a strong equity market).  

Happily, Reeves’ fiscal headroom has increased by around £2 billion to £23.6 billion in 2029-30, meaning the government has a larger anticipated buffer to meet its target of day-to-day spending being covered by revenues come three years from now. 

The statement was also light on new policies, meaning there were few spending policy surprises to digest. 

The bad news 

Perhaps less positive were elements of the economic update. The expected fall in inflation to 2% in 2026 is welcome.  

However, this will depend (in addition to slowing wage growth) on falling pressure on food and energy prices – the latter especially now much under threat from external developments in the Strait of Hormuz, with the import-heavy UK not being known for its energy security. 

On the topic of labour, what’s worrying is the OBR’s anticipated rise in unemployment from 4.75% in 2025 to over 5.3% in 2026, owing to weak hiring demand, before settling at 4.1% in 2030. 

For fixed-income investors, a key variable is real GDP growth going forwards.  

The OBR have, since November, revised down by 0.3% their forecast for real GDP growth in 2026 to 1.1% (from 1.4% in 2025) – before picking up to average at 1.6% from 2027-30.  

A stronger growth rate would help in resolving many of the issues facing the chancellor, giving more buffer to keep to her fiscal rules via elevated tax receipts, labour market strength and subsequent welfare savings, as well as giving more confidence to long-term lenders to the government, which may be reflected in yields.  

• Spring Statement 2026: IHT and CGT receipts to soar by 2031
• Is an ISA the missing part in your retirement plans?

Time will tell if the policies UK businesses and their employees are subjected to – as well as a host of external factors - allow this growth to materialise. 

The underlying risks  

The UK has languished in terms of productivity and productivity growth versus G7 countries since the financial crash, but the OBR has forecast a recovery in productivity from the historically low levels to 1% in the medium term.  

Much will hinge on this assumption though, which also underpins the forecast growth in GDP.  

Weaker-than-expected productivity growth can be a reason for substantial negative revisions to fiscal and/or economic forecasts, and it’s difficult to forecast accurately. 

For example, the OBR in their November 2025 forecast estimated that productivity growth of 0.5% per annum (closer to recent history) versus 1.5% (an optimistic, AI-fuelled scenario) may be the difference in a budget deficit versus a healthy surplus, come 2029-30. 

For fixed-income markets, the story is one of stability rather than strength. While fiscal progress has been encouraging, the UK’s trajectory and capacity to avoid a scenario in which debt dynamics and interest-servicing costs crowd out fiscal flexibility remains heavily contingent on growth and productivity delivering in line or, ideally, beyond that which is forecast. 

The impact for bond investors 

While the UK’s economy and Treasury certainly face their share of challenges, sterling bonds currently offer interesting opportunities.  

Looking at sterling bonds as a whole, while easing from the Bank of England since mid-2024 has brought down short-term borrowing costs, yields are at very elevated levels compared with the pre-2022/post-GFC low-rate period. The two-year gilt yield stands at 3.7%, while a steep yield curve means longer-dated 10- and 30-year gilts yield around 4.4% and 5.1% respectively.  

UK government bond yields are currently at a slightly higher level than comparable US Treasuries, and substantially above most European issuances.  

The UK runs one of the largest sovereign issuance programmes among developed markets and long-dated yields in particular are sensitive to shifts in structural demand, such as pension funds and insurers, as well as, of course, fiscal developments and growth and inflation expectations.  

• Everything you need to know about investing in gilts
• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis

However, while there has been substantial sterling bond volatility since the rapid tightening cycle of 2022 – which shocked bond prices – and subsequent geopolitical developments, in the current environment the yields on offer across 5 to 10-year gilt issuances surpass the anticipated inflation forecast by the OBR in the medium term (falling to 2.3% in 2026 and stabilising around 2% from 2027 onwards).  

This means, as things stand, current prices imply a real return above inflation through their maturities and – especially given their tax advantages – gilts can therefore be an appealing asset for income investors.