Gilts and sterling nosedive on mini-budget

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  • Two-year-old and five-year-old pigs suffered the most
  • The pound sterling is currently at $1.10.
  • Investors concerned about UK fiscal discipline

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UK government bonds are in free fall after Chancellor Kwasi Kwarteng’s mini-budget, with promises of high spending and drastic tax cuts scaring investors.

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The 5-year is on track for a record one-day drop, with yields jumping 50 basis points, while the 2-year is set to see its worst day of trading since 2009.

The mini-budget, which promised to end the “vicious cycle of stagnation”, also put additional pressure on the pound, with the pound falling to nearly $1.10.

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London stocks, which started the day so badly, fell even further, with the FTSE 100 and FTSE 250 both trading 1.5% and 1.2% lower by the evening.

The new Liz Truss government, led by Kwasi Kwarteng as Chancellor, spooked investors by adding more than £70bn to UK borrowing in the next financial year.

The pound plunged even lower, reaching levels not seen since 1985.

The pound plunged even lower, reaching levels not seen since 1985.

Yields on two-, five- and 10-year securities increased by 35 bp, 50 bp. and 41 bp, respectively, by mid-morning trading to 3.73% and 3.95% each, one of the sharpest daily advances on record.

Yields on prime bonds rose sharply last month as the UK economic outlook deteriorated and 10-year yields were below 1% at the start of the year.

Simply put, when a country borrows money, it issues bonds that 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 is inversely proportional to the income paid out. This means that when bonds are sold, their value drops, but the buyer is usually compensated for the higher yield.

UK government bonds – gilts – are issued with maturities of two, five, 10 and 30 years, i.e. periods during which the debt will be repaid.

This will cause alarm in HM Treasury as the cost of servicing the country’s debt will rise sharply as government borrowing rises and tax revenues fall.

Neil Wilson, chief market analyst at, said: “The bond vigilantes were just biding their time.

“The reaction in the bond market to the misnamed mini-budget (it wasn’t a mini-budget at all) is astonishing: yields soared after the chancellor announced sweeping tax cuts that forgo any semblance of fiscal discipline.

“That means more borrowing and more borrowing costs. This is not the response the chancellor wants from the budget, but what else could he expect?”

Simon Harvey, Head of Currency Analysis at Monex Europe, added: “Today’s budget showed some investors’ worst fears.

“The chancellor, in his goal of stimulating growth and expanding the supply of the economy through tax breaks and reforms, has been unable to chart any plans for fiscal consolidation in the form of offsetting spending cuts.

“In the absence of updated forecasts from the OBR, markets have had to judge for themselves whether the latest financial announcement will prove sustainable.

“Markets remain somewhat unconvinced of the government’s ability to finance its spending commitments without issuing additional debt.”

Sam Benstead, a collectives specialist at Interactive Investor, agreed that although Kwarteng “recognized the importance of fiscal responsibility,” the chancellor “didn’t make it clear in his mini-budget” and in doing so spooked the bond markets.

The yield gap on 2-year UK bonds rose by 40bp to close to 4%, the biggest 5-day net gain in the post-financial crisis era.

The yield gap on 2-year UK bonds rose by 40bp to close to 4%, the biggest 5-day net gain in the post-financial crisis era.

He added: “The yield on 10-year securities, which varies inversely with bond prices, has risen from 0.8% to 3.8% over the past 12 months as bond investors worry about the growing debt of the government, which is trying to spend the exit from trouble, even as inflation is approaching double digits.”

On Thursday, the Bank of England decided to raise interest rates by 0.5 percentage points to 2.25%, which also led to a decrease in the value of the pound sterling and securities.

Markets indicate that investors now expect the Bank of England to raise rates to 5% this cycle.

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

Mohammed Kazmi, portfolio manager at Union Bancaire Privée, said: “While the UK is suffering from an inflation problem, poor growth prospects make it unclear if they can eventually rise to the point where we think such high pricing also depends on rate repricing. observable elsewhere, not just from UK fundamentals.

“Because the Bank of England makes limited advice on future policy action [yesterday]we expect gilts to remain volatile as we wait for the data to come in.”

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