MARKETS have rallied after Jeremy Hunt dramatically ripped up most of last month’s mini-Budget policies.
The value of the pound went up and bonds rallied as Mr Hunt announced a number of mega u-turns on tax cuts.
It comes as:
Mr Hunt’s emphasis on stability was warmly received by foreign exchange with the pound trading 1.3% higher against the dollar to $1.13.
Before the announcement, it was up just under 1%.
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As Jeremy Hunt made his statement, yields on 30 year gilts carried on falling by 0.4% to 4.36%.
People pay attention to the yields – the amount of interest on the bonds which is described in % terms – because this shows investors’ confidence in them.
The higher the yield, the cheaper the price, and the riskier investors think they are.
Today’s fall in yields off the back of Mr Hunt’s statement is therefore good news for jittery markets.
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How yields have been trading has become closely watched as they determine how much money investors want in return for owning the government bonds and directly impacts the cost of borrowing for the government and mortgage holders.
Following the mini-Budget, markets have been spooked over rising government debt.
This triggered the sale of government bonds, which put several large pension funds at risk of collapse.
This would have had a catastrophic effect on some Brits’ private pension pots and likely would have resulted in a downward spiral of the market.
It meant the Bank of England had to make a dramatic intervention to buy government bonds to prevent a financial meltdown.
Some types of pension – known as defined benefit (DB) or final salary – are more invested in gilts (government bonds), and so are more exposed to falling gilt prices.
But anyone with a private pension is not directly affected by the Bank of England’s bond buying.
What are bonds?
Bonds are IOU notes that the government uses to borrow money and pay a fixed amount in interest.
Government bonds are called GILTS and are bought and sold by investors, including pension funds, who like them because they are usually fairly stable, long term investments and help cushion them from interest rate volatility.
Gilts tend to go down in price when interest rates are rising, and increase when rates are falling.
People pay attention to the yields because this shows investors’ confidence in them – the higher it is, the riskier investors think they are.
Bonds are in the spotlight at the moment because yields on gilts have currently been trading at the same highs as in the scary days of the last financial crisis in 2008, suggesting investors are nervous about the UK economy.