The pound has fallen below $1.10 for the first time since 1985 as investors feared the prospect of an increase in government borrowing to pay for the quasi quarteng’s sweeping tax cuts.
Issuing a punitive ruling on the chancellor’s “dash for growth,” traders sent Sterling in a broad-based sell-off on Friday in response to the massive increase in public borrowing needed to finance its plans.
Analysts at US investment bank JPMorgan said the market reaction displayed a “widespread loss of investor confidence in the government’s outlook”, reflecting the damage to Britain’s position in global markets.
City analysts said that the chancellor’s tax is cheaper, largest since 1972 “The Risk of a Confidence Crisis in Sterling”.
The pound fell two and a half cents to a 37-year low of $1.0993 against the dollar as fears over the future course for public finances also increased government borrowing costs. After the chancellor fell below the symbolic $1.10 mark £45bn of tax cuts announced Directed to high earners.
FTSE Following Russia’s invasion of Ukraine, trade fell more than 100% to below 7,000 for the first time since early March, while borrowing costs for the UK government on international markets were the highest in a single day in more than a decade. increased more.
Two-year UK government bond yields – which are inversely related to the value of bonds and rise as they fall – rose 0.4 percentage points to close to 4%, to reach the highest level since the 2008 financial crisis.
Borrowing costs on 10-year bonds have risen more than 0.2 percent to trade near 3.8% since Liz Truss took over as prime minister earlier this month. In early September, yields on the benchmark UK sovereign debt rose nearly one percentage point, significantly higher than comparable advanced economies.
,[It’s] Toby Nangal, a former fund manager at Columbia Threadneedle, said, “It is really hard to say to what extent the Quarteng Budget has ruined the gilt market.” Describing the scale of the turmoil, he said the five-year gilt yields were the highest in a single day since 1993 – surpassing the Covid pandemic, the 2008 financial crisis and 9/11.
Investors warned that Britain’s use of Trusonomics comes at a challenging moment, with rising interest rates from the US dollar, global central banks, and high borrowing costs in advanced economies amid weak economic growth and rising inflation.
However, he said Britain was being isolated because of the steps being taken by the new prime minister, after the government had damaged its reputation for sound economic management.
Gabrielle Foa, a portfolio manager at Algebris Investments, said: “We are in a position in which the UK government has lost a lot of credibility over the past three to four years and has in many ways extended the patience of the market.
,[It’s about] Covid management, government instability, Brexit management. It’s just one big, let’s say, series of concerns. Britain was in the first league, [but] It is moving from first to second to third. If you give some indication that you’re not credible you move up the league.”
It comes as the Treasury said it plans for the current fiscal year with £72.4bn in additional UK government debt sales for the chancellor’s tax cuts and energy price guarantees for consumers and businesses.
Instead of the £161.7bn planned by the Office of Debt Management in April, the Treasury said it would now sell £234.1bn of government bonds to international investors in 2022-23.
The change will mean investors are being approached to buy significantly more government debt than previously expected, and the Bank of England is also preparing to sell the £80bn of gilt it holds on its balance sheet for its quantitative easing programme. Used to be.
Markets bet that the bank will be forced by Quarteng’s aid plans to raise interest rates by more than 5% by May next year – on the hope they will add significantly to inflationary pressure – at the current rate of 2.25%. double from
Vivek Paul, senior portfolio strategist at BlackRock, said: “The credibility of the UK is what the markets are reacting to.
“Over time we’ll know if there will be any fundamental changes. The jury is out, [but] The initial reaction from the markets is not a ringing support. Let’s put it this way. ,
The move comes at a time when the bank responds to rising inflation by raising interest rates, Despite warnings that the UK economy is already in recession,
Antoine Bouvet, a senior rate strategist and Chris Turner, global head of markets at Dutch bank ING, said conditions are like a “perfect storm” for the UK as global markets move away from sterling and gilt.
“Price action in UK gilts continues to go from bad to worse. A daunting list of challenges has set in for sterling-valued bond investors, and the Treasury’s mini-budgets have done little to boost confidence.