British debt cost rises and sterling sinks after new economic plan

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British government bond yields posted the biggest daily rise in more than three decades on Friday, the pound fell to a new 37-year low against the dollar and shares hit six-month lows, after UK Finance Minister Kwasi Kwarteng introduced a series of tax cuts in a bid to boost growth.

The package, estimated to cost 45 billion pounds ($50 billion) for the 2026/27 financial year, was the biggest since 1972, according to the Institute for Fiscal Studies, a think tank.

Cuts in income taxes, property taxes, the exemption for foreign visitors and the suppression of a rise in corporate taxes are the objectives of the Government to give a boost to households and companies.

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

The fixed-income market went into a tailspin and five-year gilt yields – among the most sensitive to any short-term changes in interest rates or borrowing expectations – rose half a percentage point. It was the biggest daily rise since at least the end of 1991, according to Refinitiv data.

“This huge fiscal event is a radical economic gamble; an ‘all or nothing’ gamble that will put UK debt on a shaky footing,” said Bethany Payne, global bond portfolio manager at Janus Henderson Investors.

“We were concerned about the Bank of England’s ability to sell gilts on a sustainable basis through QE due on October 3rd, but today we are wondering if QE is over before it started.”

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

It is “a fiscal stimulus at a time when the Bank of England is already concerned that aggregate demand is too high, and is very likely to force the Bank of England to raise rates even higher than we thought it would.” to do,” said David Page, head of macro research at AXA (EPA: AXAF ) Investment Management.

Sterling plunged after Kwarteng’s speech, losing more than 2% of its value against the dollar to trade at $1.1022, its lowest since 1985.

Even before Friday’s announcement, sterling was under severe pressure, down 9% since early July and on track for its worst quarter since 2008, pressured by a strong dollar, sluggish UK growth and red-hot inflation.

The FTSE 100 stock index fell 1.8%, hitting its lowest level since March, and the domestic-focused FTSE 250 index fell 2.3% to a two-year low.

In another sign of stress, the cost of insuring British debt against default jumped to its highest level since mid-2020.

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