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Gilt yields soar - what gives? 5 dimensions to the selloff
Key points:
Gilts yields have soared to their highest since 2008, with the 10yr approaching 5% on Friday
Inflation worries from the transmission of higher energy prices to rising inflation is the underlying concern
A weak fiscal position and hawkish Bank of England are also to blame
We're seeing a big blowout in UK gilt front end with 2yr yield +63bps since Wednesday, up another 23bps today, 10yr touching 5% - highest since 2008...this is worse than Truss and there are lots of moving parts to consider.
What gives?
- Inflation dimension: Primarily this is about inflation worries as the conflict continues - the selloff accelerated by Axios report on potential US attack on Kharg driving further inflation shock worries, with UK particularly exposed to transmission of higher energy costs to higher domestic inflation because of our hopeless energy pricing system and govt policy errors over the years.
- Fiscal dimension: worse-than-expected govt borrowing figures for Feb revealed the fiscal position - which we know to be threadbare - was weaker than expected before the crisis in Iran. Borrowing hit £14.3bn in Feb, well above the £8.8bn expected and up £2.2bn from the same month last year.
- Monetary policy dimension: unhelpfully hawkish BoE yesterday leaning into pulling the mon pol lever to control the inflation. Although Bailey did try to walk it back a bit later the bank left the door open for the market to price in additional hikes - the central bank could sleepwalk into a Trichet-esque mistake of tightening. It's shocking to think they could even consider hiking in this environment.
- The political dimension starts to come into focus as it's all very unhelpful for Starmer and Reeves ahead of May local elections - their ticket is based on financial stability. Voters hate inflation. How soon is Reeves going to max out her headroom?
- Global dimension:- although the UK's debt selloff is on a bigger scale we are seeing global bond yields rise with US Treasuries selling off this afternoon - US 10-year 4.37% to new high since last July, US 2-year now at 3.92% - ABOVE the Fed funds rate...
Bond vigilantes are back - the UK seems to be the highest beta bond market - lots of reasons for this structurally but above lays out some of the near-term factors.