Borrowing costs

UK borrowing costs rise, pound plunges after new economic plan

LONDON, Sept 23 (Reuters) – Yields on British government bonds rose the most in one day in more than three decades on Friday, the pound slid to a new 37-year low against the dollar and stocks hit highs six-month low after UK Finance Minister Kwasi Kwarteng introduced a series of tax cuts in a bid to boost growth.

The package, estimated to be worth £45bn ($50bn) by the 2026/27 financial year, was the largest in a single event since 1972, according to the Institute for Fiscal Studies, a think tank .

Lower income tax, lower property taxes, duty-free shopping for foreign visitors and the abandonment of a planned corporate tax hike are all aimed, according to the government, at giving a boost to households and businesses.

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To fund the cuts, as well as a multi-billion pound scheme to subsidize energy bills, the government’s debt management arm said it would increase its borrowing plan for the current financial year by 45% to 234.1 billion pounds ($260 billion).

The bond market crashed, with yields on the five-year gilt – one of the most sensitive to any short-term changes in interest rates or borrowing expectations – rising by half a percentage point . It was the largest one-day rise since at least the end of 1991, according to data from Refinitiv.

“This huge fiscal event is a radical economic bet; a ‘go big or go home’ bet that will put UK debt on an unstable footing,” said Bethany Payne, global bond portfolio manager, Janus Henderson Investors.

“We were concerned about the ability of the Bank of England to sustainably sell gilts thanks to quantitative tightening which was due to start on October 3, but today we are wondering if quantitative tightening is over before it even starts. has started.”

Bondholders were already rattled by inflation and the prospect of further interest rate hikes from the Bank of England (BoE), which on Thursday raised rates by half a point to 2.25 %.

This is “a fiscal stimulus at a time when the Bank of England is already worried about too high aggregate demand, and is highly likely to force the Bank of England to raise rates further. more than we otherwise thought,” David said. Page, Head of Macro Research at AXA Investment Management.

STERLING PATE

The pound fell after Kwarteng’s speech and in the afternoon was down about 3% against the dollar to trade at $1.0896, its lowest level since 1985. It also weakened considerably against the euro, the yen and the Swiss franc. , ,

Even before Friday’s announcement, the pound was under heavy pressure. It is now down 10% since the start of July and on course for its worst quarter since 2008, under pressure from the strong dollar, sluggish UK growth and searing inflation.

The FTSE 100 stock index (.FTSE) fell 1.97% to its lowest level since March.

In another sign of stress, the cost of insuring UK debt against default has risen to its highest level since mid-2020. Read more

Data from S&P Global Market Intelligence showed that 5-year credit default swaps (CDS) – derivative instruments that debt investors typically use to hedge risk or bet against something – jumped 3.5 points basis at 34.5 points, an unusually large move for a G7 economy.

ING analysts said in a note that as there is not much liquidity in sovereign credit default swaps for Britain, foreign exchange markets were probably the easiest vehicle to trade country risk. British.

“Investors will be very interested in what the ratings agencies have to say about Britain’s fiscal plans,” they added.

“The UK’s long-term sovereign outlook is currently stable across all three rating agencies… The risk of a possible shift to a negative outlook will come with the ratings review on 21 October (S&P and Moody’s) and December 9 (Fitch).”

($1 = 0.9044 pounds)

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Reporting by Alun John, Harry Robertson and Yoruk Bahceli; written by Amanda Cooper; Editing by Toby Chopra, Susan Fenton, Kirsten Donovan

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