Following borrowing costs hitting the highest level since 2008 and the increased sell-off in the UK bond market, Oliver Faizallah, Head of Fixed Income Research at Charles Stanley, has commented.
He said: “We’ve seen a global bond sell off driven by elevated inflation globally, volatile politics and political policy (with US tariffs being a large focus on future inflation) and increasing government debts.
“UK government bonds have been punished and sold off more so than the rest of the world. This seems to be due to concerns around sticky inflation leading markets to believe we’ll have higher rates for longer. Market views on BoE cuts are more bearish than the BoE themselves, and the market is now looking at only 40bps worth of rate cuts for the year vs 60bps at the end of December.
“Higher gilt yields have increased borrowing costs, which has eroded most, if not all the UK government’s fiscal headroom. With poor growth numbers the Labour government may be forced to reduce spending, increase taxes, or increase borrowing.
“We are potentially looking at a stagflationary environment (higher inflation and poor growth) or a recessionary environment (growth falling to such an extent that inflation drops as well) in the UK.
“The market will continue to pay close attention to the data, with CPI released next week will be very closely watched. Within this CPI print, markets will be looking at services inflation, which has potential to edge higher on the back of an increase in national living wage. There is also the view that a higher living wage may result in a drop in hiring, higher unemployment and a subsequent drop in consumer confidence and inflation.
“Gilt yields at levels seen this morning look oversold, and there is still strong demand for both UK and US government bonds. This week we had the UK-5-year and US-30-year auctions, with high bids to cover ratios 3x and 2.5x respectively and yields slightly below market rate at time of bidding.”
