UK government’s borrowing costs suffer historic hike after Kwarteng ‘shocks’ investors

After last week’s announcement of Kwasi Kwarteng’s fiscal policy sparked a crash in the bond market, the UK government’s borrowing costs are on the cusp of their biggest monthly rise ever – and mortgage rates are also set to rise.

The benchmark 10-year gilt yield has risen 1.45 percentage points so far in September to 4.2 percent, the biggest monthly gain since 1979, according to Refinitiv data. Two-year Treasury yields also surged from 3% to 4.5% at the end of August, the highest in 14 years. When prices fall, bond yields rise.

“These moves are extraordinary,” said Vivek Paul, chief U.K. investment strategist at BlackRock Investment Institute. “The market has already ruled [on the government’s fiscal plans] This is not a good one. “

The turmoil in the gilt bond market has also hit the UK property sector, with major mortgage lenders such as Virgin Money and Halifax halting new home lending in response to soaring yields and volatility.

Mortgage broker John Charcol analyst Ray Boulger said he expected As of next week, “there are very few mortgage deals with rates below 5%” due to rising gilt yields.

Most of the gilt sell-off occurred in the last two trading days after Kwarteng’s announcement on Friday Biggest Tax Cut Package Combined with the widely expected energy subsidies to protect households from soaring natural gas prices since the 1970s. Bond investors are hesitant to borrow extra to pay for the schemes, which include an extra £70bn of bonds sold in the current financial year alone.

The historic losses in gilts come at a time when global government debt has plummeted and, if they persist, will lead to a significant increase in government interest payments. However, UK bonds lost more than rivals such as German bunds and US Treasuries.

The gap between 10-year borrowing costs in Britain and Germany has widened to 2.1% from 1.3% so far this month.

Adding to pressure on gilts, Kwarteng’s announcement comes as the Bank of England confirms it will Start selling gilts In portfolios acquired under previous quantitative easing stimulus programs, the process is known as quantitative tightening. The Bank of England said it plans to reduce its holdings by 80 billion pounds over the next 12 months to 758 billion pounds.

“What’s really spooking the market is the extra supply of gilts,” said Jim Leaviss, head of public fixed income at M&G Investments. “It’s a huge shock that energy subsidies, tax cuts and QT hitting the market at the same time.”

Paul said the additional bond issuance announced to fund Kwarteng’s policy changes would make it difficult to move forward with QT, which is scheduled to start next month.

“The situation with selling gilts is starting to get really bad,” he said.

Line graph of 10-year bond yield spreads (in percentage points) showing investors buying UK bonds at a premium over German bonds

The long-term nature of the Kwarteng tax cut, rather than a larger but temporary support for the energy bill, has been the biggest concern for some investors.

Dean Turner, an economist at UBS Wealth Management, said: “The UK will have a large deficit in five years, thanks to tax cuts, not support from the Energy Bill, putting the issue of fiscal sustainability at the forefront.”

Additional reporting by Emma Dunkley

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