Gilts in freefall and sterling dives as Chancellor spooks investors

UK government bonds are in free fall after Chancellor Kwasi Kwarteng’s mini-budget, with skyrocketing spending commitments and sweeping tax cuts deterring investors.

Five-year Treasuries are on track for a record one-day drop, with yields rising 50 basis points, while two-year Treasuries look set to experience their worst trading day since 2009.

The mini-budget, which promised to end a ‘vicious circle of stagnation’, also put further pressure on sterling, with the pound falling to nearly $1.10.

London-listed stocks, which had already started the day badly, fell further, with the FTSE 100 and FTSE 250 trading 1.5 and 1.2 percent lower towards the end of the morning.

The pound plunges even lower to levels not seen since 1985

Two-, five- and 10-year government bond yields added 35 bps, 50 bps and 41 bps, respectively, to between 3.73 and 3.95 percent each by mid-morning – in one of the strongest single-day gains. ever.

Government bond yields have soared over the past month as Britain’s economic outlook deteriorated, with 10-year yields offering yields of less than 1 percent at the start of the year.

In simple terms, when a country borrows money, it issues bonds, which global investors buy in exchange for regular and reliable income from the issuing country. These periodic interest payments are called coupon payments.

The price of a bond has an inverse relationship to the yield paid. This means that when bonds are sold, their value falls, but the buyer is generally compensated with a higher yield.

British government bonds – gilts – are issued with maturities of two years, five years, ten years and 30 years, the periods over which the debt will be repaid.

It will set alarm bells ringing at HM Treasury as the cost of paying down the country’s debt rises, government borrowing rises and tax revenues fall.

Neil Wilson, chief market analyst at Markets.com, said, “Bond vigilantes were just biding their time.

The bond market’s response to the misnamed mini-Budget (it was anything but mini) has been striking with yields soaring after the Chancellor announced sweeping tax cuts that give up any semblance of fiscal discipline.

‘It means more borrowing and more borrowing costs. This is not the response a Chancellor wants from a budget, but what else can he expect?’

Simon Harvey, head of FX analysis at Monex Europe, added: “Within the current budget, some investors’ worst fears have come to light.

The Chancellor, in his pursuit of boosting growth and expanding the supply side of the economy through fiscal incentives and reforms, has not set out plans for fiscal consolidation in the form of compensation for austerity.

In the absence of updated forecasts from the OBR, markets were left to assess whether the latest fiscal announcement would be tenable on its own.

“The markets are still somewhat unconvinced by the government’s ability to fund its spending commitments without issuing further debt.”

Sam Benstead, collectives specialist at Interactive Investor, agreed that while Kwarteng “recognized that fiscal responsibility was important,” the chancellor “gave no indication of this view in his mini-budget” and thereby shocked bond markets.

UK 2-year yield spread 40 basis points higher, almost 4%, marking the largest 5-day net gain in the post-financial crisis era

He added: “The 10-year Treasury yield, which is inversely proportional to bond prices, has risen from 0.8 percent to 3.8 percent in the past 12 months as bond investors worry about a government with increasingly large debts trying to spend money. his way out of trouble, even if inflation is near double digits.’

On Thursday, the Bank of England chose to raise interest rates by 0.5 percentage point to 2.25 percent, which also led to a fall in the British pound and government bonds if investors were misled.

Markets indicate that investors now expect the Bank of England to raise interest rates by as much as 5 percent in this cycle.

However, deteriorating economic prospects and growing negative perception in the eyes of investors could make this impossible.

Mohammed Kazmi, portfolio manager at Union Bancaire Privée, said: “While the UK faces an inflation problem, the poor growth outlook makes it unclear whether it will eventually be able to rise to such a degree where we believe such high pricing is also due to repricing rates seen elsewhere, rather than just UK fundamentals.

‘With the BoE providing limited guidance for future policy actions’ [yesterday]we would expect gilts to remain volatile as we await incoming data.’