UK gilts may see their underperformance this month intensify further. In October, the entire UK gilt yield curve weakened relative to German bunds, reversing the relative strength seen in the previous quarter. The budget announcement on 28 October was one of the reasons behind this shift in trend. Traders have no reason to doubt the fiscal discipline repeatedly pledged by Chancellor John Healey. However, Prime Minister Andy Burnham stated that the government will use the "flexibility space" within its fiscal rules, leaving the market uncertain about how far the government will adhere to its related commitments. Yields at historically high levels, particularly at the long end, have also compressed Healey's fiscal room for manoeuvre. The Office for Budget Responsibility uses market interest rates prevailing on the eve of the budget for its calculations, meaning that rising yields will push up the expected government borrowing costs. Monetary policy also brings another headwind for UK gilts. Traders are pricing in more than 100 basis points of rate hikes from the Bank of England over the next year, compared with 75 basis points of hike expectations for the European Central Bank. Monetary Policy Committee member Megan Greene also stated that the tightening stance of the benchmark rate is "not very strong," supporting market pricing for a rate hike next month. Taken together, the fiscal and monetary environment will cause UK gilts to continue underperforming German bunds.