UK gilt sell-off intensifies, pound drops; Wall Street falls amid Meta, Microsoft warnings
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
Key events
Closing summary
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
Susannah Streeter, head of money and markets at the investment firm Hargreaves Lansdown, said:
Fresh nervousness has crept into markets about the prospects for the UK economy, just a day after Rachel Reeves delivered Labour’s first Budget for 14 years. Initial financial market reaction was sanguine, but investors appear to have taken flight after picking over the bones of the huge tax and spending plans…
The quiet optimism that appeared to be spreading during Rachel Reeves’ speech has evaporated and a higher risk premium has returned for UK debt. Bond yields are set to stay volatile, as institutions financing government borrowing keep a more suspicious eye trained on what the swollen investment budget will be spent on.
Laith Khalaf, head of investment analysis at the stockbroker AJ Bell, said:
The sizeable fiscal loosening announced by the chancellor has prompted markets to pretty much rule out two interest rate cuts this year. Previously market expectations were for the base rate to fall to 4.5% by the end of this year, and then to under 4% by the middle of 2025.
But the inflationary nature of the measures announced in the Budget are forecast by the OBR to add 0.4% to CPI inflation in the next tax year, thereby putting pressure on the Bank of England to keep rates at higher levels for longer. Indeed, the OBR has added 0.25% to its forecasts for interest rates over the next five years to accommodate the effects of the Budget, which suggests the impact is not simply going to be a short-term blip.
Markets are still pricing in a rate cut from the Bank of England in November, but think that will be the lot for this year.
With the ten-year gilt yield now climbing to levels seen in the wake of mini-budget two years ago, it’s fair to ask whether Rachel Reeves’ maiden budget could cause similar problems. Khalaf said:
The answer is probably, and hopefully, not. The scale and speed of rises in gilt yields has not been the same as it was in September 2022, giving markets time to adjust to lower prices. We don’t know precisely how inflationary the mini-budget was, because Liz Truss and Kwasi Kwarteng chose not to ask the OBR to publish their accompanying analysis. But markets panicked, probably a result of the divergence from due process alongside an inflationary Budget at a time when inflation was much more malign than it is now. The OBR reckons CPI will average 2.6% in 2025. That’s above target, but not by a terrifying amount.
Nonetheless we can expect some impact from higher rate expectations in the mortgage and savings market. Based on what’s happened to the two-year gilt, we might start to see mortgages creeping up again, just when borrowers thought we were on a firmly downward path. However, rates are still more affordable than they were, with some fixed rates coming in under 4%. That at least gives borrowers a better base if rates do tick up a bit. On the other side of the ledger, savings rates can be expected to get a boost from the Budget and the adjustment to interest rate expectations. Higher cash rates aren’t exactly going to fund an early retirement, but savers can probably sit on their coffers a bit more comfortably, for a while at least.
UK gilt sell-off intensifies, pound drops; Wall Street falls amid Meta, Microsoft warnings
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.
US PCE inflation falls to lowest since 2021, almost hitting Fed’s target
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.
JUST IN: PCE inflation declined to 2.1% (y/y) in September — That’s the lowest since early 2021 and basically at the Fed’s 2% target.
“Core PCE” (which excludes food and energy) remains at 2.7% for the past year. There was hope that would tick down as well, but it didn’t in… pic.twitter.com/q1A71mGUuV
— Heather Long (@byHeatherLong) October 31, 2024
There is a sight of relief across the City as the budget could have been worse – says Vivek Rajak, financial sector analyst at Shore Capital.
The budget ushered something of a relief sigh across the general financials sector as speculation, which exacerbated share price movements in the preceding days, came to an end. It was less bad than feared in terms of inheritance tax, pensions taxes, betting duty and AIM’s future.
Negatives for the sector are higher capital gains tax and employers’ NIC, which will raise costs. This was a Budget aimed at income rather than savings and with pensions taxes set to rise, the medium-term outlook for assets under management formation has marginally reduced.
10-year gilt yield hits one-year high; eurozone, US yields at multi-month highs
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 government has further sold down its shareholding in NatWest Group, reducing its stake to 14.81% – halving it since March.
A spokesperson for NatWest Group said:
In March, the government’s shareholding moved below the 30% milestone. We are pleased that the continued momentum of the government’s trading plan and other activity has now halved that position to below 15%.
Returning NatWest Group to full privatisation is a shared ambition and one that is in the interest of all our stakeholders.
The government stake in NatWest is what remains from the 84% holding taken by the taxpayer at the height of the 2008 financial crisis. At the time, the UK government bailed out the bank, then called Royal Bank of Scotland, to the tune of £45.5bn to help save the UK’s financial system from collapse.
The government says it intends to exit its stake in the bank by 2025-26, but a retail offer – selling shares to the public – has been ruled out.
Bank of England launches group of AI experts
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.
UK home sales jump 9% in September
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”.
Post-budget round-up
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”.
Eurozone inflation rises more than expected to 2%
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.
