Bond market turmoil as gilt yields surpass Truss-era levels:

The cost of borrowing from the UK government rose above levels seen in the aftermath of Liz Truss’s disastrous mini-budget as strong wage data prompted warnings that interest rates could reach 6% this year.

In a day of bond market turmoil, yields on two-year government bonds rose to 4.84 percent, the highest since the 2008 financial crisis.

That’s more than the 4.75 percent reached in September last year, after then-chancellor Kwasi Kwarteng announced a massive package of tax cuts and huge spending for a package to help households with their energy bills.

At the same time, the pound climbed back above $1.26 against the US dollar for the first time in more than a month.

The pound’s rise and the rise in government bond yields came after data from the Office for National Statistics (ONS) showed wages are 7.2 per cent higher than a year ago – the biggest increase ever recorded outside of the pandemic.

While wages fell 1.3 percent in real terms due to skyrocketing inflation, the stronger-than-expected reading put more pressure on the Bank of England to raise interest rates in its fight to bring inflation back to target of 2 percent.

This in turn caused investors and economists to revise their interest rate forecasts, with many now predicting interest rates to reach at least 5.75 percent by the end of 2023 and could reach as high as 6 percent for the first time since early 2001 .

It also means that a rate hike at next week’s meeting of the Bank’s monetary policy committee from 4.5 percent to 4.75 percent is now all but guaranteed.

Bank Governor Andrew Bailey admitted that the reduction in inflation took “much longer than expected”.

And while inflation in the UK is still at 8.7 per cent – ​​down from last year’s peak of 11.1 per cent but more than four times the 2 per cent target – official figures showed yesterday that it has fallen to 4 percent in the US.

“We could look at higher interest rates longer, with all the negative consequences that would have for the housing market and consumer spending,” said AJ Bell investment director Russ Mold.

“In such a scenario, the risks of a UK recession should now be significantly greater.” But some analysts thought the market may have overreacted in its interest rate outlook.

“The fact that we have five more price increases between now and the end of the year feels like the market has gone a bit over the top,” said Lloyd Harris, head of fixed income at Premier Miton Investors.

The Bank of England clearly needs to continue walking on this point, but in our view rate hikes around the world are already starting to bite.

“This will eventually be the case in the UK, and the data, including inflation and employment figures, will begin to weaken as the second half of the year progresses.”

The prospect of even higher rates will be grim news for mortgage borrowers, many of whom will face higher repayments as banks begin to raise interest rates in response. Others have pulled new mortgage deals from the market because of the volatility.

New alarm about inflation

Inflation battle: Megan Greene will join the monetary policy committee next month

The newest member of the Bank of England’s interest rate committee has warned it will be difficult to bring inflation back to the 2% target.

Megan Greene, who joins the Monetary Policy Committee (MPC) next month, told MPs it would not be easy to get prices under control as inflation peaked at more than 11.1 percent last year.

It now stands at 8.7 percent — more than four times the 2 percent target.

Speaking to the Treasury Select Committee before officially joining the MPC, Greene said: “I think there is some underlying persistence and it’s probably easier to go from 10 percent to 5 percent than from 5 percent to 2 per cent.’

Greene, global chief economist at private research and financial advisory firm Kroll, will join the MPC on July 5 for a three-year term, replacing economist Silvana Tenreyro.