Around the autumn of last year, the UK bond market was in a crisis. The cost of living, energy price surges, and uncoated tax cuts announced by the Government, sent the UK bond market into free fall as investors couldn’t sell UK debt quick enough. With interest rates looking like they were about to soar it was only swift action from the Bank of England that stopped a domino effect rippling more widely through the UK economy. However, now the ship has stabilised.
The surprise reduction in borrowing
In addition to calming conditions, the UK Chancellor of the Exchequer Jeremy Hunt now has up to £30 billion for potential short-term giveaways for the UK’s March budget. A combination of higher income tax revenue and lower debt interest costs meant that UK borrowing is far lower than expected.
UK debt grows attractive again
The good news is that the trend of lower debt interest repayments looks set to continue as bonds are at once again attractive levels for investors to return to bonds. LGIM strategist Christopher Jeffrey says re-hedging and asset allocation could see insurers and pension funds buy around £50 billion of UK gilts this year. Bloomberg Intelligence reckons that flows into European bonds hit a new record of €5 billion in January. So, cash is being allocated back into the bond market attracted by the recent rise in yields.
So, this should mean that the UK’s crisis from last year can fade into the past. The UK’s Debt Management Office will still face difficulties in reducing the UK’s debt, but not on the scale that they could have done. The UK is set to sell £3.15 billion of gilts and inflation-linked notes this week while the BoE sells maturity bonds. In terms of the GBP, the UK will be very sensitive to any good news. More unexpected good news is likely to see the GBP spike in a reflex reaction after so much bad news has been priced in for the GBP over the last few months.