Some big investors are betting that UK Chancellor John Healey will stick to fiscal discipline in his first budget, setting off a gilts rally.

M&G Plc, Ninety One Plc, Mediolanum International Funds Ltd and Raymond James Wealth Management have bought government bonds ahead of the Oct. 28 event, positioning for a potential drop in yields if Healey can demonstrate a steady hand on spending and borrowing.

“For a new chancellor facing an uncertain backdrop, delivering a boring budget might well turn out to be the best outcome from a bond market management perspective,” said Moyeen Islam, UK rates strategist at Barclays Plc. “Healey should not give the global market a UK-specific narrative to latch onto when its focus is on Washington, Paris and Tokyo.”With 30-year yields at 5.8%, and the UK paying more than its peers to borrow, the task before Healey is to lay out Prime Minister Andy Burnham’s policies on taxation and spending while staying within the fiscal guardrails and avoiding the kind of creative accounting that would anger bond markets. If investors lose confidence in the government’s plan, recent history shows the potential for a big negative reaction.

Heading into the budget, HSBC Chief Multi-Asset Strategist Max Kettner favors gilts, and especially longer-dated bonds, on the basis that investor concerns are already priced in. They are the only sovereign bonds he recommends buying among developed market peers. According to strategists at UBS Group AG, the yield on 10-year gilts could fall by up to 20 basis points, or 0.2 percentage points, if the budget goes smoothly.

Jason Borbora-Sheen, portfolio manager at Ninety One, has added to holdings of longer-dated gilts this year with the market having already “been through the fire” and the new government having displayed “some degree of orthodoxy or concern for how gilts react to policymaking.”Britain has spent years paying a price in bond markets after former Prime Minister Liz Truss introduced large, deficit-financed tax cuts as part of a raft of new policies in a 2022 “mini-budget.”The resulting market turmoil was so severe that she abandoned most of the initiatives, fired her chancellor and resigned after just 44 days in office.

Since then, investors have reacted to any signs of fiscal profligacy by pushing bond yields higher. And recent chancellors, keen to keep borrowing costs as low as possible, have tried to convince markets that they will stick to fiscal rules that say the government can only borrow to invest and net financial debt must be falling over a three-year rolling forecast.

Those guardrails put clear limits on how much the government can borrow and how large its debt pile can become, according to Chris Jeffery, head of macro strategy at Legal & General Group Plc. That discipline “frankly doesn’t exist in the US,” and the rules are much fuzzier in parts of Europe, he said.

“I think the institutions that are set up to enshrine sustainable fiscal policy in the UK are working,” said Jeffery.

The International Monetary Fund, which bailed out the UK during a currency and debt crisis in the 1970s, has warned Healey to use cost-of-living support “sparingly” or risk reigniting inflation. But Silvana Tenreyro, its chief economist, has also said the UK stands out among Group of Seven countries for running “debt stabilizing” budget plans that are on track to bring the public finances under control.

That may be starting to change the narrative around UK debt. In July, on Burnham’s first day as prime minister, gilts sold off after he said he would seek “any flexibility” while following the government’s borrowing and spending rules. Last year, Burnham complained that the UK was “in hock” to financial markets, before walking back the comments.

More recently, Burnham’s fidelity to the fiscal rules has helped calm nerves, and investors have shifted their attention to other markets. UK 10-year yields have increased by about 0.6 percentage points since Burnham was elected to Parliament on June 18, clearing his path to 10 Downing Street. The yield on comparable French bonds have risen by more than 1 percentage point over the same period on political and fiscal concerns.

“The increases in long-term UK government borrowing costs over the last year have been mainly driven by moves in central bank policy rate expectations, rather than by changes in views of the riskiness of holding UK government debt specifically,” said Islam.

Still, some investors see significant challenges ahead for the UK, which suffers from lackluster economic growth and inflation fueled by the Middle East war. David Zahn, head of European fixed income at Franklin Templeton Investment Management, said the government is essentially waiting “for more time to come up with a plan” because there is “no appetite for spending cuts” to things like welfare in Burnham’s Labour Party.

“They’re kicking the can down the road and hoping something will come along to fix things,” he said.

Yet for now, with France in the spotlight and US debt levels attracting more attention, the budget has gone from looking like a possible stumbling block to a potential positive.

“The UK’s advantage right now is that it is being ignored and, arguably, it is the chancellor’s job to keep it that way,” said Islam.