Government borrowing costs rise to levels not seen since September’s mini-fiscal crisis as markets prepare for BofE rate hike to 5.75%
- Unemployment fell surprisingly in September as wages continued to rise
- It drives higher-than-expected inflation, indicating that the bank’s job isn’t done
Government borrowing costs have risen to levels not seen since the September mini-budget fall as new economic data pushed up interest rate expectations.
Data from the Office for National Statistics released this morning shows unemployment falling and wages continuing to rise, all but guaranteeing another key rate hike next week and projections of where it will hit a much higher high.
Yields on two-year government bonds — which rise when a bond’s price falls — rose 17 basis points early Tuesday afternoon to 4.79 percent as traders prepared for further rate hikes.
This compared to a spike of 4.64 percent after then-Chancellor Kwasi Kwarteng’s unsecured tax cuts shocked the market into a gold sell-off.
Two-year bond yields have reached levels not seen since September last year
Yields eventually fell after intervention by the Bank of England and Jeremy Hunt acting as Chancellor to scrap Kwarteng’s tax cuts.
But regardless of the latest data, Treasury yields have risen over the past month and are now higher than U.S. Treasury yields.
This comes in response to expectations of base rate hikes and more government borrowing in the coming year, while the Bank of England is currently selling government bonds on its balance sheet.
James Lynch, fixed income manager at Aegon Asset Management: ‘The circumstances why the two-year interest rate is about the same as September last year are completely different.
Sterling fell below $1.07… as investors lost confidence in the UK’s sense of fiscal responsibility.
This sharp fall in the currency led market participants to price in an extreme intra-meeting hike from the Bank of England to defend the currency (it didn’t happen), sending short-term interest rates rising from 3% to 4.7% in September. .
“The reason why the two-year rate has risen back to 4.75% is the data and the market interpretation of the Bank of England’s response.
‘The [ONS employment] data is stronger on measures the BoE cares about most: inflation and wages.”
Continued high wage price increases and higher-than-expected inflation data released in May have led the market to now factor in another 125 basis points of hikes, or five more 25 basis point rate hikes, for a final base rate of 5.75 percent.
Thomas Pugh, economist at RSM UK, said: “Overall, today’s data suggests that the labor market is not easing fast enough for the MPC to be comfortable – pointing to another 25 basis point rate hike in June and raising the likelihood of a an increase of 50 basis points. although that is not our base case scenario.
“We expect rate hikes in June and August to bring rates to 5 percent before the MPC pauses. If the labor market remains stubbornly tight, interest rates may have to be higher.’