The UK Treasury bond market is again experiencing choppy hours, reminiscent of the panic triggered by former Prime Minister Liz Truss’ tax cuts last September. call profitability gilts -Public Debt Bonds- There has been a rebound after knowing the new inflation data for the country last Wednesday. At 8.7% in April, the figure was notably lower than the 10.1% recorded in March, but much higher than many analysts were expecting.
The Bank of England (BoE) has already decided to change its mathematical model, following consecutive failed predictions that UK prices will fall sharply. “There are important lessons to be learned,” Andrew Bailey, the governor of the monetary authority, acknowledged before a committee of the British Parliament on Tuesday after the body’s decision to forecast inflation of 8.4% for the month. march.
Prime Minister Rishi Sunak himself has got stuck in the promise of halving the inflation before the end of the year. Investors now calculate that the BoE will need to keep raising interest rates, currently at 4.5%, through 2024 to exceed 5%.
The market reaction had started on Wednesday itself, but intensified on Thursday. The two-year public debt bond has seen its yield (Yield) can jump up to 17 basis points in a matter of hours. Throughout the week, the increase has reached 60 points. During the crisis triggered by the mini-budget—basically, the massive tax cuts of the Liz Truss-Kwasi Kvarteng tandem (former economy minister)—increase reached 89 basis points. The crisis has not yet reached that level, but it has reached the same level as the market crisis of 2008 and 2009.
As the yield increases, the value of the bond decreases. Investors anticipate that, with money more expensive, new debt issues will be more profitable, forcing them to reduce the value of outstanding bonds to match that yield.
Thus, government debt is higher, and investors who accumulate public debt lose value. The interest rate on ten-year UK government bonds is now 4.4%, much higher than Germany’s 2.5% or France’s 3%, and compared to just 4.3% on bonds. Italians.
“Inflation fears remain in the UK, and there are concerns about the BoE’s perceived ability to deal with the problem,” said Joel Kruger, market strategist at LMAX Group. The collapse of bonds and the pound sterling last September led to drastic intervention by the BoE, which launched itself to buy debt and warned, in the style of whatever it takes Mario Draghi’s (“whatever it takes”), who will act as often as necessary to stabilize the markets.
Since then, the new government of Rishi Sunak and his finance minister, Jeremy Hunt, has raised taxes and cut public spending. They have managed to transmit calmness and credibility to the markets, with improved relations between London and Brussels and the beginning of a resolution to the continuing dispute over the Northern Ireland lace in the post-Brexit era.
Investors say the current situation points to a fairly drastic adjustment, but possibly a more orderly one. “Markets are still speculating on what the BoE will ultimately do, and they are still hesitant. They will take some time to digest this latest blow,” warns the lead manager at global investment fund Newton Investment Management. The key will lie in the development of inflation in the coming months – especially core inflation, which excludes food. and energy—which, in the United Kingdom, refuses to go down. The IMF has revised its growth forecast for the country in 2023 and no longer predicts a recession, but points to growth of only 0.4%.
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