Gilts rally as Jeremy Hunt aims to steady market with fiscal plans

Gilts and sterling rallied on Monday after Jeremy Hunt, the new UK chancellor, took a wrecking ball to his predecessor Kwasi Kwarteng’s controversial tax-cutting plans in an effort to mollify financial markets.

The 30-year gilt yield tumbled 0.39 percentage points to 4.39 per cent, reflecting higher prices. The moves reversed part of a surge late on Friday after investors decided prime minister Liz Truss had not gone far enough by sacking Kwarteng and ditching an £18bn corporation tax cut.

Thirty-year government borrowing costs remain far above the level of about 3.75 per cent seen before last month’s £45bn of unfunded tax cuts sent markets into a tailspin and triggered a liquidity crisis for UK pension funds. Shorter-dated gilt yields also fell sharply, while the pound gained 1.2 per cent against the dollar to trade at $1.1305.

In a statement on Monday, Hunt confirmed that he was scrapping £32bn of those cuts, and scaling back energy subsidies offered by last month’s “mini” Budget. The pound and UK government bonds extended their gains as he spoke.

Gilt selling had reignited late on Friday as the Bank of England’s emergency market intervention came to an end, with the central bank having purchased just £19bn of a potential £65bn of long-dated bonds.

The BoE reiterated on Monday that the programme had finished but that a new short-term lending facility unveiled last week to help ease liquidity pressures at pension funds would continue until November 10.

Monday’s announcement from Hunt should ease the pressure on the BoE to intervene further in markets, said Antoine Bouvet, a rates strategist at ING.

“This is all very positive for markets,” Bouvet said. “It’s not just the numbers, but the fact he’s done away with the unapologetic tone and underlined that the government is listening to markets.”

“But ultimately you have to remember that market confidence has been shattered, and it’s going to take some time to rebuild.”

The latest government U-turn follows growing calls from Conservative MPs and business figures for Truss’s resignation over the weekend, with a number of cabinet ministers seeking to drum up support for potential leadership contenders.

But sterling remains down about 17 per cent this year, and analysts have warned that UK government bonds remain vulnerable. Goldman Sachs on Sunday also cut its forecast for UK economic growth and warned that it now expected a more significant recession, flagging “weaker growth momentum, significantly tighter financial conditions, and the higher corporation tax from next April”.

“There’s an expectation that if Truss is pushed out, it will draw a line under this fiscal debacle and a new government will be able to reassure markets and the public,” said Mansoor Mohi-uddin, chief economist at Bank of Singapore, the private banking arm of OCBC Bank.

But he added that the end of the BoE’s gilt purchases meant that if Truss refused to resign, sterling would reverse its gains.

Mohi-Uddin said: “The prime minister can stay on and markets will become volatile again, or if she’s forced out there might be a period of a few days of calm. But all the underlying negative fundamentals, unfortunately, remain in place.”