Round two?
Rising UK borrowing costs have failed to drag demand into the Pound. This time we are not referring to benchmark yields, with BoE Governor Bailey still insisting cuts amounting to 100-basis points are due in 2025. As we approached the new year, the 30-year gilt yield pushed above 5%, its highest level in over 25 years. Shorter term yields have also risen with the swaps market now pricing in just half of the rate cuts envisaged by the BoE governor this year. The 10-year yield touched its highest level since 2008 yesterday, another unflattering date for comparisons on UK assets.
The causes of such adjustments to the value of UK assets are squeezing any residual optimism for gilts and the Pound. They are built upon a global concern about inflation led by the US once again compounded by a lack of fiscal certainty and sustainability in Reeves’ budget. Put simply, at the same time the BoE is reducing its balance sheet, government borrowing costs are skyrocketing as investors don’t wish to fund what they see as an unsustainable government. As trading volumes spiked and volatility inched higher once again yesterday, parallels were drawn to Truss era Sterling trading – also not a good sign. Traded options volumes on Sterling were three times above their average yesterday, the highest since days of the Kwarteng ‘mini’ budget, with the order of the day reported to be downside GBP protection with popular strikes on cable sitting in the mid-teens.
The order of the day yesterday was downside Sterling protection pushing spot prices lower. The dislocation between Sterling and gilt pricing may only be resolved if opinion surrounding the government’s fiscal plans are deemed to be sustainable. Until such time, the negative feedback loop of rising borrowing costs of rising government spending requirements to service debt may continue to undermine Sterling. The jury, in the form of the market, will remain out as to whether this constitutes a sovereign crisis or a short-term lack of confidence.
Discussion and Analysis by Charles Porter
Click Here to Subscribe to the SGM-FX Newsletter
Related Insights
Daily Brief – 40K and in play…
Charles Porter
Thu 14 May 2026
40K and in play… The jostling for position amongst the Labour Party MPs hopeful for the top spot continues. Yesterday morning news emerged that Wes Streeting, a vocal candidate for the removal of Starmer, would step down from his post as health secretary. This gave Sterling a tailwind with initial reports claiming the news as […]
Daily Brief – Long weekend
Charles Porter
Tue 5 May 2026
Long weekend For the UK, it was a long weekend in the sense that it brought with it the Early May Bank Holiday. For markets, it was a long weekend for a whole different reason. With most of the rest of the world not observing a bank holiday yesterday, market liquidity remained sufficient with few […]
Daily Brief – Delayed fuse
Charles Porter
Thu 30 Apr 2026
Delayed fuse Last night’s Federal Reserve decision held all the potential requirements for a momentous occasion. Markets had been ascribing a high value to the event with options pricing suggesting the decision posed a significant risk towards exposed assets. Ultimately, the potential swan song publication of Chair Jay Powell passed without incident. Claims from some […]
