UK yields hit 11-year high as Truss package scares gilded market
Record UK borrowing costs hit their highest level in more than 11 years on Tuesday as markets feared that new Prime Minister Liz Truss’ plans to combat Britain’s cost-of-living crisis could mean a sharp increase in the supply of government debt.
British 10-Year Gold Yield TMBMKGB-10Y,
Moving in the opposite direction to prices, it jumped 9 basis points to 3.036%, breaking the 3% level for the first time since the summer of 2011.
Twelve months ago, gold was yielding around 0.6%, but it has been steadily rising in response to inflation moving to a 40-year peak above 10%, mainly due to higher energy prices.
Truss is expected to announce a spending package of more than 100 billion pounds ($115 billion) to protect families from sharply higher public utility bills, which some analysts expect will reach 6,000 pounds for the average household next year.
Deutsche Bank estimates that only about 20% to 25% of that fiscal package will be paid for by reduced government spending over the coming years – from efficiencies and reductions in the public workforce – and the rest will have to come from increased borrowing.
“Overall, the increase in borrowing should add to fiscal funding pressures, particularly at a time when the Bank of England plans to sell gold bonds starting in late September,” said Sanjay Raja, chief economist at Deutsche Bank.
The Bank of England’s gold sales form part of its monetary tightening strategy, along with raising interest rates, as it seeks to bring inflation back to its 2% target.
Depending on the composition of the fiscal support to improve energy prices, the proposal could quickly cut inflation by 4%, which in turn could reduce the need for the BoE to be assertive in raising rates, said Paul Dills, UK economist at Capital Economics. Rates from the current forecast.
However, if relieving households of the utility burden only boosts spending elsewhere, inflation may be more stable at a lower but still high rate, and the central bank may have to keep raising borrowing costs to perhaps 4%, compared to market expectations. The latter is about 3%.
Two-year golden yield TMBMKGB-02Y,
Considered more sensitive to monetary policy, it rose 9 basis points to 3.292% on Tuesday, indicating that investors were aware of Dills’ concerns. It then fell back down by 3.135%.