LONDON, Nov 26 (Reuters) - Britain's anxious budget

process reaches its climax on Wednesday when Finance Minister

Rachel Reeves releases her long-awaited plans. Yet a rallying

U.S. bond market is quietly offering the UK a cushion.

After months of hand-wringing about how Reeves will plug a

hole in the public finances while meeting her own fiscal rules,

the Chancellor of the Exchequer finally delivers the nuts and

bolts.

A series of tax rises is widely expected, though better

growth forecasts appear to have spared income tax - allowing her

to avoid breaching an election pledge not to raise it.

Even if weeks of signalling around the plans have irritated

investors, and many details will need poring over on Wednesday,

many concede the basic thrust of fiscal policy is well known.

Unlike Japan, or indeed the U.S. or France, the UK budget is

tightening and will likely allow relatively high Bank of England

interest rates to be cut again next month.

What's less clear is the fallout. The real stakes are

political and longer-term: how the package shapes growth

forecasts and business confidence and how much damage it does to

an already unpopular Labour government and the reportedly shaky

position of Prime Minister Keir Starmer within his own party.

But given the months of gloomy speculation, markets may

already have priced in much of the pain.

For gilt investors, the key signals will come from the

debt sales details: the size, timing and maturity profile of

bond sales over the next year. Many, including Barclays, expect

the issuance schedule to be manageable enough for markets to

digest without major disruption.

More broadly, the backdrop on global bond markets - in

particular U.S. Treasuries - now offers a considerable buffer to

the immediate reaction at least.

Helped by a wave of fresh speculation about another year-end

interest rate cut from the Federal Reserve next month, U.S.

government bond yields are tumbling again to their lowest in a

month.

And given the tight correlation between U.S. Treasury and

gilt yields, the latter also saw a significant pre-budget swoon.

A more direct backstop is the widely expected Bank of

England cut next month - itself likely an offset to the fiscal

tightening and justified by a retreat in worrisome inflation.

STERLING VOLATILITY SUBSIDES

One risk in that was that a UK rate cut could sideswipe

sterling. But the rising chances of another Fed cut on December

10 - just a week before the BOE's last meeting of the year - has

neutralized that to some degree.

And so, even as gilt yields have fallen back on the eve of

the budget, sterling has strengthened against both the dollar

and euro.

Despite reports of a wave of very short-term hedging of the

pound in the options market, sterling's three-month implied

volatility fell on Tuesday to within a whisker of its lowest in

more than a year and even one-month "vol" fell back sharply.

Parallel movements in the pound and bond prices may be a

touch unnerving. Coincident moves in the other direction, for

example, would raise alarm bells.

But the last-minute behavior of markets suggests an

assumption that all the angst may already be in the price.

"There may be some relief ... if Reeves avoids shocking the

market with excessive gloom regarding growth and productivity

and if the gilt market finds some reassurance regarding debt

issuance," wrote Rabobank strategist Jane Foley, adding it was

uncertain how durable that might be for the pound at least.

Equity markets, often the most skittish about tax changes,

have also rallied. Both the FTSE 100 blue chips and the mid-cap

FTSE 250 jumped up to 1% on Tuesday too.

Pent-up relief and a suspicion of 'expectations management'

over recent months perhaps explain some of the price action.

And yet a more prosaic reading might just be that Wall

Street's Thanksgiving week rebound is setting a more favourable

tone and the bar for negative surprises locally has therefore

risen higher.

Maybe the absence of U.S. markets for much of the rest of

the week will give a clearer picture as London trades on its own

for a bit. But with both sides of the pond heading into a

rate-cutting December, bond-market ructions may now be a tall

order.

The opinions expressed here are those of the author, a

columnist for Reuters

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