A sacked chancellor and another embarrassing fiscal policy U-turn were still not enough to restore calm to the febrile UK Gilt market as participants debated the best way to restore stability ahead of Monday’s re-opening.
Having cut short his trip to Washington DC for the Annual Meetings, Kwasi Kwarteng was fired upon his return home on Friday by the prime minister Liz Truss. Truss replaced him with former health secretary Jeremy Hunt on Friday and reversed another of the tax cuts Kwarteng had announced on September 23 in a desperate attempt to restore confidence in her leadership and calm to UK markets.
The early signs in the Gilt market were that it was another failure. “Markets are all over the shop,” said a sterling rates market trader at a major UK bank on Friday night. “It is absolutely mind blowing.” The fear now is that Monday will see even greater carnage.
The Gilt market has proved a volatile place since Kwarteng announced £74bn of extra borrowing to fund tax cuts and energy bill support in a mini budget at the end of last month. Over Wednesday and Thursday, yields across the curve rallied a whopping 60bp before giving half of that back as leaks emerged of the latest policy U-turn on Friday morning.
NO CONFIDENCE
Having already reversed plans to cut the top rate of income tax, Truss said she would also press ahead with an increase in corporation tax, worth £18bn, which her government had said it would freeze, tax cuts having been a major part of her leadership campaign during the summer.
“Markets are disappointed with the extent of the U-turn,” said the trader. “The market is broken, and dealers won’t take on risk. Levels on screens are so far off and if you blink, you miss when trying to put a hedge on. You don’t expect that in what is supposed to be a risk-free market. There’s no liquidity and no confidence.”
Opinions differed, however, as to whether it was the Bank of England or the government that was to blame for the market chaos and which of them could arrest it.
The Bank stepped in to buy Gilts on September 28 as long dated yields rocketed. It has said it would not buy any Gilts after Friday but this, in the eyes of one senior debt capital markets banker, was a bigger problem than any government policy.
“It’s not tenable to have the Bank saying one thing and the government another,” said the head of European DCM. “I’m not sure the Bank understands that it’s not all about the government. The Bank doesn’t see QT [quantitative tightening] as an issue but the market sees it very differently.”