UK gilts suffer biggest slump since March 2020 meltdown

Pedestrians walk past the Bank of England, in London, Britain August 8, 2022. REUTERS/Toby Melville

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LONDON, Sept 22 (Reuters) – British government bond prices plunged on Thursday into their biggest daily decline since the COVID-19 collapse in March 2020, reflecting global market movements and bond investors’ unease over to the economic plans of Prime Minister Liz Truss.

While it was a bad day for major government bond markets around the world following the US Federal Reserve’s decision to raise interest rates by 75 basis points, investors targeted UK debt for some of the strongest sales.

The Bank of England followed the Fed on Thursday with a smaller 50 basis point hike, which failed to provide a lasting boost to the pound after hitting a fresh 37-year low of 1 $.1210 against the US dollar.

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Gilt yields, which move inversely to price, rose as a minority of three BoE rate setters opted for a bigger rate hike of 75 basis points, then peaked after the Finance Ministry confirmed it was reversing a recent payroll tax hike. Read more

The potential scale of additional government borrowing implied by Truss’ plans has undermined investor confidence in gilts over the past month.

On Friday, Finance Minister Kwasi Kwarteng is due to brief parliament on tax cuts and plans to help households and businesses struggling with high energy costs.

On Thursday, the yield on 10-year gilts rose above 3.5% for the first time since April 2011 and as of 1530 GMT was up 20 basis points on the day – the biggest such rise since March 2020, when the onset of the COVID-19 pandemic triggered the market. chaos.

Marc Ostwald, chief economist at brokerage ADM Investor Services, said much of the gilt selloff reflected the reaction to the Fed’s decision overnight.

“But part of that is … also that we’re being drip-fed this fiscal event tomorrow. And it continues to look like spend, spend, spend; borrow, borrow, borrow,” Ostwald said.

A slim majority of bond strategists and economists in a Reuters poll released this week said there was a high risk that confidence in British assets would deteriorate sharply over the next three months. Read more

The spread between UK and German benchmark 10-year bond yields hit 156.4 basis points on Thursday, the highest since 2015.

Gilt yields rose 19 to 20 basis points across the maturity spectrum, with two- and five-year yields hitting their highest levels since late 2008.

The yield on the 10-year gilt rose 70 basis points in September so far, following a 94 basis point increase in August that was the largest in 36 years.

Taking August and September together so far, the yield increase would be the largest since October and November 1979, according to Refinitiv data.

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Reporting by Andy Bruce; Editing by Catherine Evans

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