Gold News

UK Gilt Prices Sink on Kwarteng's £181 Billion Debt Shocker

UK's creditors asked to lend 13% more in 6 months...
WHY has the UK government debt market taken such fright at today's 'maxi-mini' budget? asks Adrian Ash at BullionVault, taking a quick breather from buying gold in Zurich, trying to re-finance his mortgage, and renewing his passport.
I mean, Gilt yields – which move opposite to Gilt prices – have never jumped so fast. Like, never. Because Gilt owners can't get out fast enough...
Change in UK Gilt yields on Friday morning, 23 September 2022. Source: Bloomberg
...helping knock the Pound yet lower again on the FX market, down to fresh 4-decade lows versus the Dollar and fresh post-Covid lows versus the Euro as capital flees Sterling like it's 1931-plus- 1967-plus- 2016 all in one morning.
Well, before the new "Conservative" Government's new "growth" plan grew nothing as fast as the cost of borrowing at 09:30 London time today, total outstanding UK government Gilts currently in issue = a record £2,175 billion according to the Debt Management Office.
Some £838bn of that debt is held by the Bank of England (thanks to quantitative easing), and the government itself held a further £125bn of its own borrowing (in nominal, not market value) at last count.
So that puts around £1,178bn-worth of UK national debt out in the market, lent to the state by pension funds, banks, foreign as well as local UK government, insurance companies and so on.
As it was, before new UK Chancellor Kwasi Kwarteng's straight-back-to-the-70s announcements of Friday morning, the DMO already had another £96bn to raise from the bond market this tax year. That was needed to finance the gap between the 'Conservative' Government's existing spending and tax plans before April 2023.
Kwarteng's new deficit splurge now requires an additional £72bn in debt for 2022/23. Around £10bn of that will (hopefully) come from short-term Treasury bills (enticed perhaps by short-term rates now a mere 8 percentage points below inflation). So £62bn will – between now and April – hit the longer-term Gilt market for which all the other data here apply.
But on top of that, the Bank of England repeated only yesterday that it wants to cut its QE holdings by £80bn over the next 12 months. (Y'know, to show willing on trying to stem inflation, currently above 10% per annum on the Consumer Price Index and already sending the UK's national debt-servicing costs to an August record last month, thanks to the inflation protection promised to index-linked bond holders.) Given that about £40bn of that will happen anyway as some of the Gilts it holds reach maturity, that makes £10bn per calenar quarter to be sold into the market = £20bn between now and April.
Let's add that to all those other borrowing demands for cash about to hit the Gilt market...
...[tap tap tap]...
...and buyers must now be found to lend £181bn to Whitehall to fund central UK government and the Bank of England's QT plans over the next 6 months.
Sounds like a lot. And it is. In fact, it's over 13% of what the market's buyers currently hold in total. Which is already record lending. And they're being asked to add £1 to every £7.65 of those holdings. In just 6 months.
Chart of 5-year UK Gilt yields to Thursday's close (with Friday's spike added in red). Source: Bank of England
Long story short?
The markets disliked the Bank of England's weak-kneed attempt at fighting inflation on Thursday, And the markets really hate the Government's new 'Growth Plan' for super-charged borrowing as it slashes tax without slashing spending.
Here's hoping they both take the weekend off. Maybe don't show up Monday?

Adrian Ash

Adrian Ash, BullionVault Gold News

Adrian Ash is director of research at BullionVault, the world-leading physical gold, silver and platinum market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and he has now been researching and writing daily analysis of precious metals and the wider financial markets for over 20 years. A frequent guest on BBC radio and television, Adrian is regularly quoted by the Financial Times, MarketWatch and many other respected news outlets, and his views from inside the bullion market have been sought by the Economist magazine, CNBC, Bloomberg, Germany's Handelsblatt and FAZ, plus Italy's Il Sole 24 Ore.

See the full archive of Adrian Ash articles on GoldNews.

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