UK bonds rallied and the pound fell to its lowest since April after Rachel Reeves flagged that she may use the Budget later this month to create more fiscal headroom for the government.
The Chancellor delivered a surprise early morning "scene-setter" speech, the Treasury called it, to forewarn the public why she needs to make some tough decisions at the 26 November fiscal event.
While the leader of the opposition derided the speech as "waffle", possibly because it laid much of the blame for the country's current economic predicament at the door of the previous Tory governments, it was fair to say there were few precise conclusions that could be nailed down at first listen.
However, reading between the lines, it was possible for investors, market analysts and economists to discern the message that Reeves was trying to get across while not giving the exact details of the Budget before the event.
Michael Brown, senior research strategist at brokerage Pepperstone, said there were three principal takeaways from the speech.
"The Chancellor all-but-confirmed that the OBR will be downgrading its trend productivity growth forecasts; Reeves noted that she is seeking a greater degree of fiscal headroom (>£9.9bln that was left in the spring) to protect against future shocks; Reeves refused to repeat the manifesto promises not to raise income tax, national insurance, or VAT."
Combining the three means fiscal tightening is likely to be "much, much more" than was previously expected to address a hole in the public finances of around £35 billion.
On top of a £20 billion hole from the OBR productivity downgrade, there will be an extra £5 billion from not cutting welfare spending, £3 billion from measures to cut consumer energy bills, and between £5 billion and £10 billion to build a larger buffer the £9.9 billion in the spring statement.
Tom Selby, director of public policy at platform AJ Bell, said the fact that Reeves emphasised that "we will all have to contribute" gives a very strong signal that the government are preparing to go against their manifesto and lift income taxes.
"That would certainly be the simplest way to raise the tens of billions the chancellor is likely to need to meet her self-imposed ‘ironclad’ fiscal rules and would potentially allow her to front-load the pain with an eye on loosening spending as the general election approaches," said Selby.
Sterling fell 0.5% against the US dollar to intraday low of $1.3059, while the price of UK government borrowing fell.
UK 10-year yields were down 2 basis points, while 30-year yields are down by a similar amount.
Gilt yields have been a "major outperformer", that ie yields have fallen more than others, over the past three months, and in the past month, in particular, said Kathleen Brooks, head of research at XTB.
The 30-year Gilt yield is lower by 36bps in the past month and the 10-year yield is lower by 31bps.
"This does not mean that the gilt market is giving the Chancellor’s plans for tax rises without meaningful public sector spending cuts or cuts to the benefits bill, a ringing endorsement.
"Instead, a rise in the tax base could make it easier for the Chancellor to build bigger fiscal headroom, the amount that the country has to spare if a crisis hits.
"The bond market is happy with the government building up the UK’s rainy-day fund, as it makes the debt we need them to buy safer.
"The question now is, will Gilt yields continue to fall?"