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 – Rotation out of the US
Humphrey Percy
Mon 14 Apr 2025
Rotation out of the US Quite what that rotation may mean and by how much is exercising the markets and also doubtless the Chair of the Federal Reserve. For the yield on 10 year US Treasury Bonds to move from 3.99% to 4.50% in a week is extraordinary. At the same time, the US Dollar […]
Daily Brief – UK Employment
Humphrey Percy
Wed 16 Apr 2025
UK Employment At 75.1%, employment for people aged 16-64 looks sort of OK depending on what that really means, but it does not alter the fact that there are currently 1.55 million people who are unemployed, or 4.4% of the potential workforce. Another much more significant number, is that there are currently 9.27 million people […]
Daily Brief – China
China FX has found some breathing room against the backdrop of a weaker Dollar. As we know, that weaker Dollar is largely created by two factors. Firstly, the Dollar losing its safe haven status and even attracting a risk premium as investors shield themselves from the uncertainty of President Trump’s tariff game. Secondly, again as […]
