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The markets were quick to respond to Kwasi Kwarteng’s ‘shock and awe’ mini-budget.
The most spectacular reaction by far was in the bond market where yields on gilts (UK government IOUs) immediately spiked higher on the prospect of a big surge in government borrowing.
Mr Kwarteng announced some £45bn worth of tax cuts and, along with the sums the government will be spending to protect households and businesses from the impact of higher energy bills, it means there is going to be more borrowing this year than previously announced.
Mini-budget – latest reaction
Sure enough, the Treasury said it will be asking the Debt Management Office – the Treasury agency that manages the national debt and oversees the government’s borrowings from the markets – to raise an additional £72bn in gilt sales this year.
This will be done via additional gilt sales of £62.4bn, taking the planned total in 2022-23 to £193.9bn, along with additional sales of Treasury bills of £10bn.
The bond market delivered its response at once.
The yield (an implied borrowing cost for the government) on 10-year gilts, which was 3.495% at the close of business on Thursday evening surged to as much as 3.842% at one stage – a level not seen since April 2011.
Similarly, the yield on 5-year gilts, which on Thursday evening stood at 3.353%, surged at one point to 4.047% – a level last seen in October 2008. It is the biggest one-day move seen in 5-year gilts in 31 years. Meanwhile, the yield on 2-year gilts rose to their highest level since October 2008 in their biggest one-day jump in 13 years.
These are big, significant moves which show that investors are demanding a higher premium to reflect the risk of lending money to the UK.
In fairness, the UK is not the only country to have seen an increase in its bond yields in recent weeks, with the yield on US Treasury bonds and even German government bonds recently rising to multi-year highs. But the increase in gilt yields is…
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Source : skynews
