Aviva Shuns Longer UK Gilts With Budget Anxiety Set to Return

Aviva’s Caution Reflects Broader Investor Concerns Ahead of UK Fiscal Tightening

As Britain transitions into a new political landscape post-election, financial markets are already positioning themselves for what may be a turbulent fiscal period. Aviva Investors, one of the UK’s most influential asset managers, is notably steering clear of longer-dated government bonds, signaling growing concerns over the country’s budgetary outlook and potential fiscal slippage.

Avoidance of Long Gilts: A Defensive Stance

Aviva Investors has taken a bearish stance on longer-maturity UK government bonds — commonly referred to as gilts — citing fiscal uncertainty as a key driver. Daniel James, senior fund manager at Aviva, emphasized the heightened risks on the horizon.

“We remain cautious on long-duration gilts as we expect volatility to pick up in the second half of the year,” James said. “There’s likely to be renewed debate on public spending and taxation under the new government, and that will put upward pressure on yields.”

Aviva’s concerns align with broader market sentiment, as investors anticipate a resurgence in fiscal tension that could complicate the UK's economic recovery and its inflation outlook.

Market Context: Post-Election Repricing

Following Labour’s sweeping general election victory, markets initially responded with relative calm, pricing in expectations of continuity in economic policy. However, gilts began to weaken in the subsequent sessions, particularly at the long end of the curve. The yield on 30-year gilts has climbed above 4.5% — its highest since early May — suggesting reduced investor appetite for long-term UK debt.

The Bank of England has kept rates at a 16-year high of 5.25%, and while rate cuts are on the horizon, uncertainty surrounding fiscal consolidation plans and potential spending commitments has reignited fears of government borrowing pressures.

Analysts Expect Fiscal Tightening and Market Reactions

Economists believe that while the Labour government will aim for fiscal prudence, pressure to boost public investment could lead to difficult choices between spending, borrowing, or taxation — all of which could impact gilt markets.

David Owen, chief European economist at Jefferies, noted:

“Markets are right to be cautious. The UK’s debt-to-GDP ratio has risen materially since the pandemic, and any deviation from fiscal discipline — even marginal — will prompt bond vigilantes to reprice risk aggressively.”

The Office for Budget Responsibility (OBR) has already projected that government debt could rise above 100% of GDP within a decade without structural fiscal reforms.

Aviva’s Strategy: Focusing on Short and Mid-Dated Gilts

In response to the evolving landscape, Aviva Investors has increased its allocation to shorter and medium-term gilts, which are less sensitive to long-term inflation and interest rate risks. The firm views these maturities as more stable, given the current monetary policy trajectory and expectations of BoE easing starting late Q3 or early Q4 2025.

“We prefer 5- to 10-year maturities, which we think will benefit more directly from the Bank’s rate cuts and provide better risk-adjusted returns,” added James.

This pivot also allows Aviva to maintain some exposure to UK fixed income while mitigating the downside risk posed by longer-dated instruments.

Budget Watch: Key Dates for Investors

All eyes are now on the upcoming Autumn Budget, expected to be unveiled in October or November. This will be the first major fiscal test for the new administration, and its content could either reinforce investor confidence or exacerbate gilt market volatility.

Labour has pledged to stick to its fiscal rules, which include a commitment to reduce debt as a share of GDP within five years. However, questions remain about how this will be achieved without deeper spending cuts or tax hikes.

Historical Parallels and Current Sentiment

The cautious approach recalls memories of the 2022 UK bond crisis, when former Prime Minister Liz Truss’s unfunded tax cuts sent long gilt yields soaring, prompting emergency intervention by the Bank of England to stabilize pension funds and institutional portfolios.

Although current conditions are far less dramatic, investors remain wary of any signs of fiscal mismanagement. Foreign investors — who hold over 30% of the UK’s outstanding gilts — are particularly sensitive to fiscal credibility, making it imperative for the new government to communicate a clear, sustainable path forward.

Investor Outlook: Risks and Opportunities

While Aviva’s move may reflect short-term caution, analysts believe that opportunities will re-emerge once fiscal clarity is restored.

Sarah Hewin, head of research at Standard Chartered, said:

“A credible fiscal plan in the Autumn Statement could provide a platform for gilt rally, especially if accompanied by a slowing economy and a dovish BoE. For now, defensive positioning makes sense.”

For investors, the key will be agility — watching macroeconomic indicators closely, interpreting government policy signals, and adjusting exposure accordingly.