LONDON – Britain’s borrowing costs rose after the Labor government unveiled huge borrowing and tax hike plans in Wednesday’s budget, but analysts played down the possibility of a second “mini-budget” crisis in British bond markets.
this 10-year gilt returnAn index representing the government’s medium-term borrowing costs fell slightly at 2:45 pm London time on Friday. However, the rate remains above 4.4%, up from around 4.3% before Wednesday’s budget. this 2-year gilt rate of return It rose from around 4.2% on Wednesday to 4.414% on Friday.
Yields are inversely related to prices, so rising yields represent a sell-off in bonds and an aversion to UK debt financing.
As well as raising taxes by around £40bn, Finance Minister Rachel Reeves on Wednesday announced a significantly higher increase in short-term borrowing than many economists had expected. Reeves said the measures were necessary to transition the budget to a balanced day-to-day spending while investing in public services and infrastructure. Many of her plans are announced to the public in advance to prepare for market impacts.
But given Britain’s recent history of bond volatility, traders remain nervous, even though many macro conditions – notably a significant cooling of inflation – are now different. In autumn 2022, former Prime Minister Liz Truss was widely criticized for wreaking havoc on markets by announcing, without any prior warning, a massive increase in borrowing to fund tax cuts. The incident caused bond yields to skyrocket and even threatened the stability of pension funds.
In reports analyzing this week’s budget, some economists said the scale of the fiscal expansion announced by Levi’s would lead to a slight rise in inflation and a slower pace of Bank of England rate cuts; although others argued that given falling inflation levels in the services sector, the Bank of England would Monetary policy will be eased at the same pace.
Debate also ensues over the extent to which her policies will boost economic growth, a key objective of the Labor government. The Office for Budget Responsibility – a government-funded but politically independent body – has upgraded the UK’s near-term growth prospects but lowered its long-term forecasts five-year forecast Published Wednesday.
Deutsche Bank strategists said the budget was unlikely to deliver significant growth benefits beyond the five-year horizon, beyond a short-term boost.
Susannah Streeter, head of currencies and markets at Hargreaves Lansdown, said the rise in UK debt risk premiums was not just down to investor concerns about inflation budgets.
Street told CNBC’s “Squawk” program: “There are also concerns about where all this additional investment spending is going to go and how responsible the government will be in using these funds. So, to some extent, the UK’s Risk premiums have returned.
She continued: “This is nothing like what we saw in the Trusonomics mini-budget, when the spike was really high after the unfunded tax cuts were put in place.”
“It’s just an additional level of fatigue that, you know, this is a huge tax bill, this is a huge spending budget, so is the government going to be careful in executing its strategy? I think that’s what bond investors want to see.”
Easy to produce
As was the case following the Truss mini-budget, GBP initially fell against the USD and EUR before rebounding modestly on Friday. Sterling rose 0.5% against the dollar on Friday, trading around $1.296.
Ballinger Group foreign exchange analyst Kyle Chapman said British government bond yields may take some cues from the United States on Friday, with U.S. bond yields rising at The weaker-than-expected jobs report appeared to strengthen the case for the Federal Reserve to cut interest rates more aggressively.
Jane Foley, head of foreign exchange strategy at Rabobank, told CNBC that Finance Minister Reeves would be relieved when UK government bond yields fell back from their highs on Friday for whatever reason.
“But UK asset markets are still at high levels and it may take a few trading days to return to calm,” she told CNBC.
“If UK investors get some head start from US markets, it could be a sign that normality is returning, but gilts and sterling are likely to remain on edge ahead of next week’s Bank of England meeting and its latest inflation and GDP forecasts ,” Foley said.
global attention
Mohit Kumar, chief financial economist for Europe at Jefferies, told CNBC that “markets are right to be worried about the UK’s fiscal outlook.”
“Our expansionary budget (includes) £70 billion of spending is funded by tax increases. The problem is that many think tanks are questioning whether tax increases will bring you as much money as you hope.” Not obvious.
“But secondly, the backdrop on the fiscal front is worrying. The U.S. election is coming up and the market is very worried about the U.S. election and what will happen on the fiscal front…Globally, there are growing concerns about fiscal deficits and issuance .
Kumar said this week’s moves in the bond market were also somewhat technical, as “heightened trading” in the UK was washed out and investors benefited from a rise in long-term yields relative to short-term yields.
“If inflation were higher and economic growth was higher, the Bank of England wouldn’t need to cut interest rates so sharply,” Kumar said.
Despite the dangers posed by a sustained sell-off in bonds, he said he did not see a repeat of the 2022 mini-budget.
Kumar noted that the move is “very technical in nature” when debt-driven investments are sensitive to the long end of the curve. “We think we’re still very far away, at least 100 basis points away.”
He added, “But I think fiscal concerns are very legitimate, and the bottom line is, if we get a big Republican victory[in the upcoming U.S. election]and we get more fiscal concerns, I think the bond market could still Increase production.
—CNBC’s Sam Meredith contributed to this article
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