The UK bond market isn’t cheering the latest fiscal measures

Bonds are blowing up today and none worse than gilts. New chancellor Kwasi Kwarteng today rolled back a 1.25 percentage point increase in payroll tax that came into effect earlier this year. He also said that a planned dividend tax would be scrapped from April 2023.

At the same time, he said promised spending increases in health and elsewhere would remain.

There are two ways to spend more and tax less:

  • Go into debt
  • Grow more quickly

The growth outlook isn’t looking good as the energy crisis bears down. In terms of debt, it’s a triple-whammy with more spending, fewer tax revenues and rising interset rates.

10-year UK gilt yields are up 19 bps today to 3.51%, which is the worst single day since the covid meltdown and the highest since 2011. That’s certainly not an entirely UK-driven story with US Treasury yields up 16 bps and German 10s up 8 bps but it’s certainly not a sign of the bond market expressing confidence in UK finances.


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