UK government borrowing costs hit historic rise after hitting gilts


UK government borrowing costs are on track for their biggest monthly rise on record – and mortgage rates are also set to rise – following the bond market crash triggered by Kwasi Kwarteng’s fiscal policy announcement last week.

The benchmark 10-year gilt yield has risen 1.45 percentage points so far in September to 4.2%, marking the biggest monthly jump in Refinitiv data dating back to 1979. Two-year yields have risen also increased, from 3% at the end of August to 4.5%, the highest in more than 14 years. Bond yields rise when prices fall.

“The moves are just extraordinary,” said Vivek Paul, chief UK investment strategist for the BlackRock Investment Institute. “The market has given its verdict [on the government’s fiscal plans] and it’s not a good one.

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

Ray Boulger, an analyst at mortgage brokerage John Charcol, said he expected there would be “very few mortgage deals available with rates below 5%” from next week due the rise in gilt yields.

The bulk of the gilt selloff has occurred in the past two trading sessions, after Kwarteng on Friday introduced the biggest package of tax cuts since the 1970s, alongside energy subsidies widely expected to protect households from soaring gas prices. Bond investors have balked at the additional borrowing planned to pay for the plans, including an additional £70bn of debt sales in the current financial year alone.

The historic gilt losses, which will result in a significantly higher interest bill for the government if sustained, came amid a global public debt rout. However, losses from British bonds exceeded those of rivals such as German Bunds and US Treasuries.

The spread between UK and German 10-year borrowing costs widened to 2.1 percentage points from 1.3% so far this month.

Adding to the pressure on gilts, Kwarteng’s announcement came a day after the Bank of England confirmed it would start selling gilts from its portfolio acquired under previous quantitative easing stimulus packages. , a process known as quantitative tightening. The BoE said it plans to reduce the size of its holdings by £80bn over the next 12 months, to £758bn.

“It’s the additional supply of gilts that’s really scaring the markets,” said Jim Leaviss, head of public fixed income at M&G Investments. “The energy subsidies, tax cuts and QT hitting the market simultaneously are a huge shock.”

The announced additional bond issuance to fund Kwarteng’s policy changes will make it difficult for QT to continue, which is expected to begin next month, according to Paul.

“The optics of selling gilts are starting to look really bad,” he said.

Line chart of 10-year bond yield spread (percentage points) showing investors are demanding a growing premium to buy UK debt versus German bonds

The long-term nature of Kwarteng’s tax cuts, as opposed to greater but temporary support for energy bills, has been the biggest concern for some investors.

“Because of tax cuts, not energy bill support, in five years the UK deficit will be large, highlighting fiscal sustainability issues,” said Dean Turner, economist at UBS Wealth Management. .

Additional reporting by Emma Dunkley


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