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Selling in the gold market intensified on Thursday as UK borrowing costs hit their highest level this year due to investor concerns about further borrowing set out in Chancellor Rachel Reeves’ Budget.
The 10-year bond yield rose 0.17 percentage points to 4.52%, and the 2-year bond yield rose 0.22 percentage points to 4.53%.
The pound fell 0.8% against the US dollar to $1.286, its lowest level in more than two months.
The move followed volatile trading on Wednesday, when the scale of the government’s additional borrowing became clear and bond markets initially responded favorably to Labour’s first budget in 14 years. As Reeves spoke, the 10-year Treasury yield fell to 4.21%.
“The budget seemed OK, with enough flags for the new fiscal rules… but the amount of additional borrowing going forward still caught the market by surprise,” said investment manager State. Michael Metcalf, Head of Macro Strategy at Street.
“[It’s] “It’s amazing how much a story can change in 30 minutes,” he added.
Analysts said markets were reacting to parliament’s £28bn annual increase in borrowing, following what the Office for Budget Responsibility called “one of the biggest fiscal developments in recent decades”. He said that
Figures from the Debt Management Office showed that bond sales are likely to reach £300bn this year, higher than previously expected at £278bn and slightly above investors’ expectations.
“There’s a lot of risk aversion going on,” said Moeen Islam, a fixed income strategist at Barclays, who said investors are reducing positions ahead of a number of big events, including the U.S. jobs report and the election. “There’s no one here to stabilize the market.”
Ben Nicol, senior fund manager at Royal London Asset Management, said the scale of the market movement was a sign that bullish gold investors were rushing to sell their holdings, and that Reeves expected more gold issuance in the near future. He said that one reason for this is that there is a possibility of strengthening the system. .
“I think there is a fear that Labor will have to go back into the bond market in April to borrow more and raise taxes,” he said.
The jump in yields has pushed Britain’s 10-year borrowing costs closer to the peak of 4.63% seen after Liz Truss’s September 2022 “mini” Budget, which triggered the gold market crisis. But investors downplayed the similarities to the Truss scandal, which saw yields rise by a third of a percentage point on Budget day alone and the pound crashed to an all-time low in the aftermath.
“There is no reason to question the credibility of the UK’s public finances,” Pimco economist Peder Beck Vries said. “The government intends to bring the primary deficit to a significant surplus for the first time since the early 2000s.” Government debt “may not decline for several years, but [but] It is unlikely that it will rise dramatically. ”
Instead, investors pointed to comments from the OBR that the additional borrowing was not fully anticipated by investors and was likely to lead to higher interest rates over the next few years.
JPMorgan’s Alan Monks said Labor’s “big taxing, borrowing and spending” decisions would boost short-term growth and inflation.
He added that the Budget “changes the way interest rates are calculated” and makes it more likely that the Bank of England will go ahead with quarterly interest rate cuts.
The swap market is moving toward pricing in a slower pace of interest rate cuts next year. Investors are now expecting a rate cut of three to four quarter points over the next 12 months. Before the budget, they were expecting four or five.
British shares fell as traders dialed back hopes for a rate cut. The FTSE 100 fell 1%. The domestically focused mid-cap FTSE 250 fell 1.8% after rising 0.5% in the previous session.
