Breaking News
Investing Pro 0
NEW! Get Actionable Insights with InvestingPro+ Try 7 Days Free

U.K. Bond Meltdown Worsens After Kwarteng Promises "More to Come"

Economy Sep 26, 2022 11:02
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
© Reuters.
 
GBP/USD
+0.20%
Add to/Remove from a Portfolio
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
GB2YT...
+0.29%
Add to/Remove from a Portfolio
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
GB5YT...
+0.72%
Add to/Remove from a Portfolio
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
GB10Y...
+0.79%
Add to/Remove from a Portfolio
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 

By Geoffrey Smith 

Investing.com -- The rout in sterling and U.K. bond markets worsened on Monday as investors took fright at the new government's sweeping and unfunded tax cuts.

By mid-morning in London, yields on U.K. Gilts had soared as markets priced in more interest rate hikes from the Bank of England in response to a mini-budget seen by most analysts as inflationary.  Expectations of a strong monetary policy reaction helped the pound to recover most of the ground it lost at the opening, when it fell to a new all-time low against the dollar. 

The moves came after the Chancellor of the Exchequer, Kwasi Kwarteng, said on Sunday that there was "more to come" from the government, on top of the 161 billion pound ($173 billion) tax giveaway announced on Friday. 

Analysts called the moves a damning judgment on the new government's change of course, which reversed the drift toward higher taxation and budget deficit reduction under Boris Johnson.

"The U.K. government has planted a forest of magic money trees and the bond market has taken a chainsaw to them all," said Paul Donovan, chief economist with UBS Global Wealth Management, in a morning briefing. 

The moves sent shock waves through bond markets worldwide in early trading in Europe on Monday, raising fears that the U.K's distress may be a sign of broader things to come for advanced economies as they struggle to contain the consequences of this year's energy price shock. The tax cuts announced by Kwarteng on Friday are, in fact, smaller than the estimated cost of the energy subsidies for businesses and households that he announced over the course of last week. 

By 05:35 ET (09:35 GMT), the yields on benchmark 2-Year and 5-year Gilts were up half a percent at 4.49% and 4.56%, respectively, while the benchmark 10-year Gilt yield was up 34 basis points at 4.17%.  

"While the collapse in sterling grabs the headlines, it is the abrupt rise in borrowing costs that really matters," Donovan said, arguing that the rout explodes the claims of so-called 'Modern Monetary Theory', which encourages higher government borrowing in the belief that the state has all the tools necessary to control the inflation which that generates. 

"Modern Monetary Theory has been taken into a dark corner by the bond markets and been convincingly beaten up," Donovan said. 

Others warned that the market may be expecting too much from the Bank of England, which said last week that it didn't expect to adjust its own policy again until its meeting in November. Governor Andrew Bailey had acknowledged that the mini-budget, which was announced after the BoE's half-point rate increase on Thursday, would have the potential to materially alter the outlook for growth and inflation. 

"We think markets are overestimating the chance that Governor Bailey will call an emergency meeting this week," said Pantheon Macroeconomics' Samuel Tombs in a note to clients. "Bailey likely will be concerned that an emergency hike triggered by financial market movements will set an unhelpful precedent; predictability is valuable." 

He added that the Bank is already under political pressure - Prime Minister Liz Truss had mooted ending its independence during her campaign for the Conservative Party leadership during the summer - and that it may not want to antagonize the government with a move that would be interpreted as an open challenge to its authority.

Consequently, Tombs warned that the pound is likely to slide further in the near term. 

U.K. Bond Meltdown Worsens After Kwarteng Promises "More to Come"
 

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (3)
Theo Marshall
Theo Marshall Sep 27, 2022 10:24
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Seriously is the taxpayer supposed to borrow to fund a tax cut for the rich?
Graham Kinnear
Graham Kinnear Sep 26, 2022 13:06
Saved. See Saved Items.
This comment has already been saved in your Saved Items
The BofE is useless and has been well behind the curve for some time. They should of raised interests at a more rapid rate ages ago instead of insisting that inflation was transitory. Now they will need to raise rates at a higher levels to get on top. 75 basis in Oct
dixon method
dixon method Sep 26, 2022 11:43
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Short GU
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email