Post-budget sell-off of government bonds by worried City traders intensifies, pushing up UK borrowing costs – as it happened

UK government bonds have sold off, pushing yields (or interest rates) up.

The yield on the benchmark 10-year gilt (as government bonds are known) jumped by 15 basis points to a one-year high of over 4.5% at one stage, as traders grew alarmed about Rachel Reeves’ big rise in borrowing to fund investment spending in yesterday’s budget. This means that the government is likely to issue more bonds.

The 10-year yield is now trading 10bps higher at 4.43%.

Interest rate expectations have also been scaled back, as the Office for Budget Responsibility judged that the budget was likely to raise inflation slightly. Before the budget, markets were expecting the Bank of England to cut rates from 5% to about 3.75% by the end of next year, with a first quarter-point move next Thursday. Now, they are forecasting fewer reductions, to around 4% by end of 2025.

However, analysts said today’s market moves could not be compared to the disastrous mini-budget delivered by Kwasi Kwarteng under Liz Truss in September 2022, when gilt yields jumped by 33 basis points in one day.

Thank you for reading. Take care – JK

The sell-off of UK government bonds has gathered pace, pushing yields sharply higher following the budget. Investors have become increasingly alarmed about the sharp rise in borrowing to fund investment. This means that the government is likely to issue more bonds.

The pound rose in early trading but has now lost nearly 0.8% against the dollar and the euro in response to the bond sell-off.

The yield, or interest rate, on the benchmark 10-year gilt jumped as much as 15 basis points and is now 14bps higher at 4.481%, the highest level in a year. The two-year gilt yield, which is more sensitive to interest rates, jumped by 20bps to a five-month high of 4.5% while the 20-year yield rose by 11bps to 4.89%.

10-year yields jumped more after Liz Truss’ mini-budget of unfunded tax cuts two years ago, but were at similar levels then (in the aftermath of the mini-budget, yields surged to 4.558% on 28 September 2022, the highest since the financial crisis of 2008, prompting the Bank of England to intervene). Yields were even higher in the summer of 2023, when markets feared that interest rates could stay high for a prolonged period of time.

Analyst Kyle Chapman, at Ballinger Group, said the rise in yields is due to what

the market now appears to have concluded are overextended borrowing and spending plans in the budget.

The OBR reckons that the net effect is an average of over £30bn a year in increased gilt issuance over the next five years, and a total supply of nearly £300bn in this fiscal year. Yields have risen over the past couple of days in response to the increased bond supply, but the move has intensified over the course of this afternoon. The volatility in the gilt market has been extraordinary, with the 10-year yield up 30bps in the past 24 hours alone.

Interest rate expectations have also been scaled back, as the Office for Budget Responsibility judged that the budget was likely to raise inflation slightly. Before the budget, markets were expecting the Bank of England to cut rates from 5% to about 3.75% by the end of next year, with a first quarter-point move next Thursday. Now, they are forecasting fewer reductions, to around 4% by end of 2025.

Eurozone and US bond yields have also risen as investors have scaled back expectations of interest rate cuts, after stronger-than-expected inflation and growth data for the eurozone.

The 10-year German Bund yield rose by 5bps to 2.42%, the highest since late July.

The gap between British and German two-year yields reached 210bps, the widest level since September last year.

The 10-year US Treasury yield also rose by 5bps to 4.31%, despite a drop in the Federal Reserve’s preferred measure of inflation to 2.1%. However, the core measure held at 2.7%, slightly higher than expected, while consumer spending also increased a little more than forecast.

On Wall Street, stocks fell after warnings from Facebook owner Meta Platforms and Microsoft about soaring artificial intelligence costs led to a tech sell-off.

Thank you for reading. Happy Halloween! Back tomorrow. – JK

EU fines Teva over multiple sclerosis drug

Lisa O’Carroll

The European Union has fined pharmaceutical giant Teva €462.6m for “abusing its dominant position to delay competition to its blockbuster medicine” for the treatment of multiple sclerosis, Copaxone.

It said Teva had implemented “a systemic disparagement campaign” to stop cheaper rivals come to market.

After an anti-trust investigation, the European Commission found that Teva did this by artificially extending the patent for the drug.

In a damning indictment of the company, it said Teva had also “systematically spread misleading information about a competing product to hinder its market entry and uptake” of cheaper glatiramer acetate medicines.

It found that when its own patent for glatiramer acetate was running out it misused the procedures by filing multiple sub or divisional patents in a staggered way, “creating a web of secondary patents” around its own drug.

When rivals challenged it, Teva started enforcing these patents against competitors, the European Commission said in a statement issued on Thursday.

Teva said:

The company is deeply disappointed by this decision and has been cooperating extensively with the EC since 2019. Teva disagrees with the Commission’s legal theories which are legally untested and, Teva believes, not supported by the facts. The company will vigorously defend its position on appeal and is well prepared financially to mount a defense.

Teva conducts its business lawfully and ethically and has been a strong partner to Europe, its patients, economy and healthcare systems. This misguided decision will not distract Teva from its unwavering support for patients living with MS and their families.

Inflation in the US on the Federal Reserve’s preferred measure has fallen to its lowest level since early 2021.

The closely watched measure of US inflation slipped to within striking distance of policymakers’ target after the Fed scrambled to bring down price growth from its highest level in a generation.

Inflation, measured by the personal consumption expenditures price index, declined to an annual rate of 2.1% in September from 2.3% in August, according to the Bureau of Economic Analysis.

Core PCE inflation, excluding volatile food and energy, remained at 2.7%, though, against hopes that it would slip too.

UK government bonds are extending their post-budget sell-off, pushing yields higher.

This is response to the planned higher borrowing in coming years, and as investors scaled back bets on interest rate cuts, with yesterday’s budget measures expected to push inflation higher.

The Office for Budget Responsibility has warned that the budget would lead to slightly higher inflation, which could lead the Bank of England to keep interest rates higher for longer.

The 10-year gilt yield has climbed by 7.5bps to 4.42%, the highest in a year.

But eurozone bond yields are also up and on track for the biggest monthly rise since April – as investors expect a slower pace of interest rate cuts from the European Central Bank.

The yield, or interest rate on Germany’s benchmark 10-year government bond rose as much as 5 basis points to 2.425%, its highest since late July and is now at 2.41%.

The eurozone benchmark yield has increased by 27bps in October, which looks to be the biggest monthly gain since April.

Investors are digesting the latest data and what it means for interest rates. Eurozone inflation was higher than expected at 2% in October, according to Eurostat’s flash estimate today. The eurozone economy grew by 0.4% in the third quarter, faster than expected albeit still fragile, data showed yesterday.

US Treasury yields have also risen sharply – by 47bps this month, which if sustained will be the biggest increase in six months.

The Bank of England has launched a search for a new group of artificial intelligence (AI) experts, as it raises concerns over the risks that the technology might pose to financial stability.

Sarah Breeden, the central bank’s deputy governor with responsibility for financial stability, flagged the risks in a speech entitled ‘Engaging with the machine: AI and financial stability’.

AI is expected to bring considerable potential benefits for productivity and growth in the financial sector and the rest of the economy. But for the financial sector to harness those benefits we, as financial regulators, must have policy frameworks that are designed to manage any risks to financial stability that come with them. Economic stability underpins growth and prosperity. It would be self-defeating to allow AI to undermine it…

We should be alive to the possible need for macroprudential interventions to support the stability of the financial system as a whole. We should keep our regulatory perimeters under review, should the financial system become more dependent on shared AI technology and infrastructure systems.

She said the Bank was launching an AI consortium of the private sector and AI experts “to help us understand more deeply not only AI’s potential benefits but also the different approaches firms are taking to managing those risks which could amount to financial stability risks”.

We will consider what we can do to spread best practices widely in the industry and whether further regulatory guidelines and guardrails are needed.

The central bank’s financial policy committee will publish its assessment of AI’s impact on financial stability and set out how it will monitor those risks going forward.

The Bank already warned last December that rapid developments in artificial intelligence and machine learning could pose risks to the UK’s financial stability.

The number of UK home sales in September rose by 9% year-on-year, according to figures from HM Revenue & Customs (HMRC).

Across the UK, an estimated 91,820 properties were sold in September, which was a tad higher than in August. This was the first time sales increased month on month –albeit by less than 1% – since May, HMRC said.

In the financial year so far, between April and September, an estimated 547,350 home sales have taken place. Hope has started to return to the housing market but sales growth has stagnated in recent months, property experts said.

Nick Leeming, chairman of estate agency group Jackson-Stops, said home buyers have been “pressing on with their searches amid falling interest rates and positive wage growth”.

Here is our full story on the IFS verdict on the budget:

The budget is likely to mean smaller pay rises for workers because of the impact on businesses, Rachel Reeves has conceded.

The chancellor said she recognised “there will be consequences” to her first budget, which includes £40bn in tax rises, more than half of which come from increasing tax on businesses.

The International Monetary Fund has welcomed the measures announced by Rachel Reeves in her first budget, saying her £40bn of tax rises would boost growth “sustainably”.

In a rare intervention, the Washington-based IMF backed her increase in investment and extra spending to ease the financial pressure on public services and boost growth.

A spokesperson for the fund said new budget rules showed the government was committed to bringing down the UK’s debts over the longer term.

“We support the envisaged reduction in the deficit over the medium term, including by sustainably raising revenue,” they said, adding that the IMF approved of the government’s “focus on boosting growth through a needed increase in public investment while addressing urgent pressures on public services”.

Inflation in the eurozone picked up more than expected, rising to 2% in October, mainly driven by energy and food prices.

The annual inflation rate was up from 1.7% in September, according to a flash estimate from Eurostat, the statistical office of the European Union. Core inflation, which strips out energy and food costs which tend to be volatile, stayed at 2.7%, also slightly higher than expected.

Separate figures from Eurostat showed unemployment came in at 6.3% in September –stable compared with August, and at a historic low since the eurozone was established in 1999.

Services inflation is estimated to have the highest annual rate in October (3.9%, stable compared with September), followed by food, alcohol & tobacco (2.9% versus 2.4% in September), non-energy industrial goods (0.5% vs 0.4% in September) and energy (-4.6% vs -6.1% in September).

In the biggest European countries, inflation is estimated to have risen to 2.4% in Germany from 1.8% in September, while France had 1.5% inflation versus 1.4% and price increases picked up to 1% in Italy, from 0.7% in September.

You can see the full country by country breakdown here.

“The direction of incoming data in the region is not quite clear, which provides the European Central Bank with confusing signals for the path of rate cuts,” said ING economist Bert Colijn.

After the rapid decline in September, this provides a reality check about the eurozone’s disinflationary process.

The ECB frequently used the motto that ‘the last mile is the hardest’ when it comes to inflation fighting before summer, but hasn’t done so recently. The slow decline in core inflation gives us the feeling that there is still some truth to that. The labour market remains tight at the moment, which still adds to wage pressures. We expect wage growth to come down over the course of 2025 as labour market tightness continues to ease, but we aren’t seeing this effect just yet.

He said the drop in unemployment to a historic low indicates that inflationary pressures from the job market are not yet a thing of the past.

Including yesterday’s accelerating GDP growth figures, this week’s data has provided some counterweight to the ECB’s dovish view presented on inflation at the October press conference. ECB President Christine Lagarde referred to all data pointing in the same direction: downward.

Two weeks later, all data points in a different direction: upward. Lagarde has often warned against data point dependency, but may have fallen into the trap of the plural of that – data points dependency.

Summing up, Colijn said:

Taking a step back from the short-term confusing signals, we see a eurozone economy that continues to struggle to rebound, with third-quarter GDP data overstating momentum due to one-offs.

The job market remains strong, but with profit growth down, we expect this to affect the labour market negatively over the course of next year. This keeps demand driven inflation down, which should help to bring inflation – including core – down to target in 2025. Still, upside risks to the outlook remain as labour market pressures have yet to fade and wage growth remains elevated for now.

IFS verdict on budget

Richard Partington

Rachel Reeves could be forced to find more money to fix public services after her budget made a start at reversing the “unrealistic” and irresponsible spending plans of the Conservatives, the Institute for Fiscal Studies has said.

Britain’s leading experts on the government finances said the chancellor’s tax measures on Wednesday had allowed for a substantial short-term increase in public servicing spending this year and next, but not thereafter.

Paul Johnson, the director of the IFS, said there would need to be “more to come” after Labour’s first budget in 15 years outlined £40bn of tax increases needed for the emergency cash injection.

Saying the spending plans amounted to “pretending” that Labour would splurge in the early years before reining in spending in future, he said:

That’s not going to happen. The spending plans will not survive contact with her cabinet colleagues.”

I am willing to bet a substantial sum that day-to-day public service spending will in fact increase more quickly than supposedly planned after next year.

The IFS said that while the spending increases announced by Reeves appeared big relative to the previous government’s plans, this was in large part because “their plans were unrealistic”.

“Despite the apparent scale of the increases, this is not going to feel like Christmas has come for the public realm,” Johnson said.