(Bloomberg) -- The broad selloff in UK markets amid fears of persistent inflationary pressures and higher government spending are prompting memories of the 2022 gilt meltdown, with analysts describing the moves as a small version of that crisis.
UK bonds slumped over the past days, taking the benchmark 10-year yield to the highest since August 2008 and the 30-year rate to levels last seen in 1998. The pound sank to the lowest since April and a measure of market sentiment hit the most bearish level in 14 months. British stocks tumbled, putting the FTSE 250 mid-cap stock index on track for its worst two-day drop since August.
While the moves come along a global market rout, gilts have underperformed and the pound is leading losses among its major peers. UK investors are particularly worried that lingering price risks will keep the Bank of England cautious about cutting interest rates, while higher yields may force the Labour government to raise taxes or increase borrowing further.
Here’s the latest reaction from market participants interviewd by Bloomberg News.
Kathleen Brooks, research director at XTB:
“The government needs to start acting now, and not delaying big, difficult decisions. Bond vigilantes are not stalking the market yet, but they are watching from the sidelines.”
“The Labour government could get the market back onside if they speed up their review of public spending, trim spending in a measured way that does not impact GDP and if they make a clear plan to ensure the NHS remains affordable.”
“The market is crossing its fingers for economic growth in the UK, however, I do not think that more tax rises would be welcomed by the market, since business and consumer confidence are so low.”
Robert Dishner, senior portfolio manager at Neuberger Berman:
“The move lower in GBP along with higher rates is concerning”
“While borrowing costs are going up globally, the UK has some of the least headroom.”
Brad Bechtel, head of FX at Jefferies:
“GBP seems to be reacting to gilts more and more and that means we are spilling further and further into fiscal emergency territory.”
“We don’t ‘feel’ like we are in the same Liz Truss zone right now, mostly because we haven’t seen an LDI blow up, but we are in a micro version of that for sure.”
Roberto Cobo Garcia, head of G-10 FX strategy at Banco Bilbao Vizcaya Argentaria:
“It looks like a small ‘Truss moment’ that could be amplified if investors start to price a more dovish BOE or/and if fiscal woes increase.”
“Sterling is suffering as yields rise despite the absence of a clear driver. The problems in the housing market, Fitch warnings about the sector, fiscal imbalances and potential additional headwinds from potential confrontation with the US administration are favoring some positioning squaring and a shift in monetary policy expectations.”
Aneeka Gupta, director of macroeconomic research at WisdomTree:
“It’s a critical time for UK markets. The Labor government is trying to portray the party as one of financial discipline, but they need to follow through with the budget. There’s signs of stress in the market.”
“UK mid-caps could come under a lot of pressure with rates rising this much. Of the three major central banks, the BOE is in the toughest position. It has to balance anemic growth along with wages that are still strong. That doesn’t allow them to cut rates as much as the ECB could. So there’s less likelihood of a tailwind from rates coming down.”
Jordan Rochester, head of macro strategy, Mizuho:
“The October budget relied on optimistic growth projections and assumed lower refinancing costs. The maths didn’t really add up at the time to cynics like myself and it certainly doesn’t any longer with the fixed income selloff likely to force the Chancellor to have to reign in spending or raise taxes again to meet her new fiscal rules. The Spring update will likely be a fiscal tightening - making the optimism from the OBR and BOE forecast update post budget look quite wrong indeed.”
“This is a year with some of the highest net issuance of QE in history and Bond Vigilante was one of our tail risks for the year in our outlook. I just hope it doesn’t become the word of the year.”
Win Thin, global head of markets strategy at Brown Brothers Harriman in New York
“Markets are starting to realize that high UK rates are hurting the economy, and so the luster is gone.”
Megum Muhic, strategist at RBC
“This isn’t a healthy move.”
“General concerns surrounding debt sustainability, resurgence of inflation and potentially inflationary Trump policies are all contributing to the narrative.”
James Athey, portfolio manager at Marlborough Investment Management
“With long end rates now significantly above 5% we think that term premium is compensating investors for some of those risks. Indeed, the move in rates is really pressuring the government with regard to fiscal policy such that any notion of boosting growth is slipping out of reach.”
“Ultimately we think the market is also misinterpreting what a stagflation environment might mean, if indeed that’s where we are headed in the UK. It is highly likely that the most hawkish thing the BOE will do in a stagflation environment is keep rates higher. Weak growth and above target inflation with a central bank on hold at rates above neutral should flatten not steepen the yield curve in our opinion.”
Matthew Amis, investment director at abrdn
“The gilt market loves drama.”
“For us, it’s wait and see, the volatility in gilts only kicked off about an hour ago. Looks like a few big stop outs in futures and then quite a lot of credit issuance.”
--With assistance from Alice Atkins, Greg Ritchie, Sagarika Jaisinghani and Joe Easton.
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