A Gilt Buyer Strike Is Not In the UK’s Future
Chancellor Rachel Reeves deserves the benefit of the doubt from skeptical markets.
The hard hats Liz Truss and Chancellor of the Exchequer Kwasi Kwarteng wore weren’t to protect against the crashing gilt market in 2022.
Photographer: WPA Pool/Getty Images EuropeI can't be alone in wishing for the Oct. 30 budget statement from UK Chancellor of the Exchequer Rachel Reeves to be over and done with. The interminable lead-up has been a succession of rumors, hints and fantasy scenarios. Most likely, it won't be that exciting. Which would be a blessed relief for the UK government bond market, as chatter abounds of a gilt buyer strike if Reeves leans too heavily on borrowing.
I flagged this risk in early September but some perspective is needed. With reports of the more ambitious tax-raising plans being reined in, so will caution most likely be applied to debt raising.
Putting it into context, gilt traders haven’t priced in any outsized fears, yet. The Bank of England is certainly dragging its heels, in relative terms, over lowering rates. Combined with budget concerns, which have been priced in for some while, it broadly explains the UK yield premium to peers. Government finances have worsened this fiscal year, so the current annual £278 billion ($363 billion) gilt borrowing remit would probably be revised higher regardless of budget measures.
Over the past two months, gilts are more or less tracking the US Treasury market's battle to determine what, if any, economic landing occurs. The rate-cut path of the Federal Reserve, and the fiscal plans of the next president, are driving the global rates bus.