Liz Truss tax U-turn fails to halt bond market sell-off

Liz Truss tax U-turn fails to halt bond market sell-off

As Bank of England pulls plug on life support, Liz Truss tax U-turn fails to halt bond market sell-off

  • Fears UK assets will come under more pressure next week
  • Prime Minister’s actions fail to assuage political critics
  • Yields on 30-year bonds  climbed sharply in wake of press conference by Truss

UK bonds sold off last night after investors were left unconvinced by Liz Truss’s attempt to undo the damage of her government’s mini-Budget. 

The sell-off came just as the Bank of England ended its £65bn intervention that was designed to end markets chaos. 

Now there are fears that UK assets will come under more pressure next week after the Prime Minister’s U-turn on corporation tax and sacking of chancellor Kwasi Kwarteng failed to assuage her political critics or answer doubts over the Government’s finances. 

Intervention: Governor Andrew Bailey refused to extend the Bank’s bond-buying scheme

Yields on 30-year bonds – which move in the inverse direction of prices – climbed sharply in the wake of a press conference by Truss to announce the reversal of corporation tax plans. 

Earlier in the day, bond markets had been rallying in anticipation of the U-turn. The 30-year yields – which represent the returns demanded by investors for lending to the Government – were as low as 4.25 per cent yesterday morning but by late afternoon soared above 4.8 per cent. 

That took them to the same level as they were on Thursday, before speculation about Truss’s latest policy switch had begun. 

Shorter dated bond yields also rose while the pound fell by nearly two cents to as low as $1.1153.

In stocks, the FTSE100 gave up gains of more than 100 points seen earlier in the session to end just 8.5 points higher. 

‘In all, markets seem unconvinced that today’s announcement was enough,’ Investec economist Ryan Djajasaputra said. Reversing corporation tax and a plan to scrap the 45p top rate of income tax still leaves the Government with £25billion of unfunded tax cuts left over from the £45bn originally touted in the mini-Budget. 

Paul Dales, chief economist at Capital Economics, added: ‘It’s unlikely the removal of Kwasi Kwarteng and the new plans to cancel the cancellation of the rise in corporation tax from 19 per cent to 25pc from next April will be enough on their own to regain the full confidence of the financial markets.’ 

It was carnage in 30-year bonds that had seen the Bank of England step in on September 28 with a pledge to buy up to £5billion long-dated bonds a day for 13 days. 

The intervention seemed to do the trick initially but volatility erupted again. The Bank beefed up the programme last Monday by expanding it to include inflation-linked bonds, as well as upping the daily limit to £10billion. 

However, governor Andrew Bailey acted to squash speculation that it would be extended beyond its end date of yesterday – rejecting pleas by pension funds that had been caught up in the crisis. During an event in Washington earlier this week, Bailey warned: ‘You’ve got three days left now. You’ve got to get this done.’ 

A final daily auction yesterday took the Bank’s total bond purchases to £19.3billion, comprised of £7.2billion of index-linked bonds and £12.1billion of conventional bonds. 

James Athey, investment director at Abrdn, said there had been a ‘small sigh of relief in UK assets over the past 24 hours but added: ‘The good news for the gilt [UK bond] market is probably already over.’

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John-paul Ford Rojas

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