Delivering a punitive verdict on the chancellor’s ‘dash for growth’, traders saw sterling fall on Friday in a broad-based sell-off in response to the huge increase in public borrowing needed to finance his plans. Analysts at US investment bank JPMorgan said the market reaction showed “a wider loss of investor confidence in the government’s approach”, reflecting damage to Britain’s position in global markets. Analysts at Citi said the chancellor’s tax break, the biggest since 1972, “risks a crisis of confidence in sterling”. The pound fell two and a half cents against the dollar to a new 37-year low of $1.0993 as fears over the future course of public finances also pushed up government borrowing costs. The drop below the symbolic $1.10 mark came after the chancellor announced £45bn of tax cuts aimed at higher earners. pound falls The FTSE 100 fell more than 2% to trade below 7,000 for the first time since early March, following Russia’s invasion of Ukraine, while the UK government’s borrowing costs on international markets rose to their highest in a day for more since a decade. Yields on two-year UK government bonds – which are inversely related to the value of bonds and rise as they fall – jumped as much as 0.4 percentage points to near 4%, hitting their highest level since the 2008 financial crisis. Borrowing costs on 10-year bonds rose more than 0.2 percentage points to trade near 3.8%, continuing the dramatic rise that has been underway since Liz Truss took over as prime minister earlier this month. In early September, yields on the UK’s benchmark government debt rose by almost one percentage point, much more than for comparable advanced economies. “[It’s] It’s very hard to overstate the extent to which Kwarteng’s budget has just destroyed the gold market,” said Toby Nangle, former fund manager at Columbia Threadneedle. Highlighting the scale of the turmoil, he said five-year gold yields had risen by the most in one day since 1993 – surpassing the Covid pandemic, the 2008 financial crisis and 9/11. Investors warned that Britain’s experiment with Trussonomics comes at a challenging time with a rising US dollar, increased interest rates from global central banks and higher borrowing costs in advanced economies amid weaker economic growth and surging inflation. But they said Britain stands out after years of the government tarnishing its reputation for sound economic management, combined with the steps being taken by the new prime minister. Gabriele Foa, portfolio manager at Algebris Investments, said: “We are in a situation where the UK government has lost a lot of credibility over the last three to four years and it has pushed the market’s patience in many ways. “[It’s about] Managing Covid, government instability, managing Brexit. It’s just a long, shall we say, series of concerns. United Kingdom was in the first league, [but] moves from first, second to third. If you give any signs that you’re not trustworthy, you move leagues.” It comes after the Treasury said it would fund the chancellor’s tax cuts and energy price guarantee for consumers and businesses with £72.4 billion in extra UK debt sales than planned for the current financial year. Subscribe to Business Today Get ready for the business day – we’ll point you to all the business news and analysis you need every morning Privacy Notice: Newsletters may contain information about charities, online advertising and content sponsored by external parties. For more information, see our Privacy Policy. We use Google reCaptcha to protect our website and Google’s Privacy Policy and Terms of Service apply. Instead of the £161.7bn planned by the Debt Management Office in April, the Treasury said it will now sell £234.1bn of government bonds to international investors in 2022-23. The change will mean investors are reaching out to buy far more government debt than previously expected, and comes on top of the Bank of England preparing to sell £80bn of gold it holds on its balance sheet thanks to its quantitative easing programme. . Markets are betting the Bank will be forced by Kwarteng’s support programs to raise interest rates above 5% by May next year – more than double the current rate of 2.25% – with expectations that they would add significantly to inflationary pressures . Vivek Paul, senior portfolio strategist at BlackRock, said: “UK credibility is what markets are reacting to. “In time we will know if there will be a fundamental change. The jury is out, [but] the initial reaction from the markets is not a resounding approval. Let’s put it this way.” The moves come as the Bank responds to a surge in inflation by raising interest rates, despite warning that Britain’s economy is already in recession. Antoine Bouvet, senior rate analyst, and Chris Turner, head of global markets at Dutch bank ING, said conditions amounted to a “perfect storm” for the UK as global markets shunned sterling and gold . “Price action in UK female gold is going from bad to worse. A daunting list of challenges has emerged for investors in sterling bonds and the Treasury’s mini-budget has done little to boost confidence.”
