November 24, 2022
  • November 24, 2022

UK bonds slide to cap chaotic week after Truss U-turn on tax cut

By on October 14, 2022 0

(Bloomberg) – UK markets are making more reversals than the government these days.

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Benchmark bonds fell as Prime Minister Liz Truss confirmed she would reverse a planned corporate tax freeze, having previously headed for the biggest weekly rally in a decade. The pound tumbled in a reversal of a push on Thursday, when speculation swirled over fiscal changes.

“While Truss has largely confirmed market expectations, there are not many new details compared to what has already been leaked in the press,” said Valentin Marinov, currency strategist at Credit Agricole. “The risk for PM Truss is that his latest concessions will only embolden the markets as they push for a complete dismantling of the government’s growth agenda.”

The moves cap off another tumultuous week in UK markets, with historic moves in debt and the pound yo-yoing on sentiment developments. Traders looked to the government to adjust its fiscal plans as the Bank of England’s bond-buying intervention in the gilt market ended on Friday.

Markets are currently weighing whether the changes will be enough to put the UK’s debt back on a sustainable footing, given that some unfunded tax cuts are still in the works. Truss has replaced Kwasi Kwarteng as Chancellor with Jeremy Hunt, who she says shares her “desire for a high-growth, low-tax economy”, leaving traders to also speculate on how long she will live.

It’s “certainly a statement to calm the markets – nice to see but doesn’t change the fundamentals too much,” said Jordan Rochester, currency strategist at Nomura International Plc. “I can imagine that buys Liz Truss a few days – but if the polls stay where they are, it’s the same story, just a delay in the inevitable.”

Bonds have faced turbulence since Kwarteng’s mini-budget in late September called for borrowing-fueled tax cuts, which saw voter support for the ruling party plummet in polls, lenders withdrawing mortgage products and an intervention by the BOE to boost confidence.

The central bank bought longer-dated, index-linked gilts to help pension funds deal with margin calls during the sell-off. After record buying on Thursday that helped support bond market gains, he bought £1.45 billion on Friday. Ten-year yields rose 13 basis points to 4.33% at the close of trade in London, after falling from a 30 basis point decline earlier.

The pound traded down 1% to $1.1214 against the stronger dollar, paring the gains made on Thursday. It is still the best performing major currency this week in a rally fueled by speculation that the government may change course.

(Updates throughout.)

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