Sterling and gilts fell on Thursday as investors digested Jeremy Hunt’s plans to repair the UK’s public finances, unwinding part of a strong rally in the run-up to the chancellor’s Autumn Statement.
The pound traded 1.0 per cent lower on the day at $1.179 against the dollar after Hunt detailed a package of spending cuts and tax rises that he described as a “path to stability”, extending losses seen before the chancellor began his statement to parliament. Sterling remains well above late September’s all-time low of less than $1.04 and not far below a three-month high of more than $1.20 reached earlier this week.
Gilts came under pressure after the UK Debt Management Office said Hunt’s measures would result in a reduction in bond sales in the 2022-23 financial year to £170bn, below the figure of £194bn at the time of Liz Truss’s ill-fated “mini” Budget in September and less than the £185bn expected by investors. However, although the DMO does not provide a gilt sales figure for the following year, the government’s financing requirement for 2023-24 was higher than that expected by markets at more than £300bn.
The 10-year gilt yield traded at 3.22 per cent, up about 0.09 percentage points on the day, and far below the high of more than 4.5 per cent hit in late September after Truss’s unfunded tax cuts spooked markets.
“All the focus in the last few weeks has been on the shift from Truss to Hunt and [Prime Minister Rishi] Sunak, who said all the right things to reassure markets,” said Antoine Bouvet, an interest rates strategist at ING. “But now people are looking at how much gilt investors need to swallow next year, and it’s going to be a record amount by far. That’s what’s worrying the market.”
The involvement of the OBR, which presented fiscal forecasts to accompany Hunt’s plans — in contrast to the sidelining of the Budget watchdog by Truss — reassured investors, said Nomura currency strategist Jordan Rochester.
“But what the Budget will do eventually is lower UK growth expectations down the line,” added Rochester.