The cost of government debt is once again at the forefront of investors’ minds as the Bank of England kicks off a new programme to sell down its gilt holdings as it unwinds quantitative easing.
It is hoped the Bank’s decision to currently not sell any long-dated gilts (20 years+) should help alleviate any concerns that this new programme will undo all the support it gave to markets last month when it bought gilts in the wake of the government crisis, in turn helping to drive down yields.
Russ Mould, investment director at AJ Bell, said: “In early trading, the UK five-year gilt traded at 3.514% versus 3.609% in the previous close. The 10-year gilt stood at 3.418% versus 3.51% yesterday.
“Markets expect a 0.75 percentage point increase for the UK base rate at Thursday’s meeting, taking rates to 3% as the Bank of England continues to fight inflation. As ever, we’ll see some investors demand aggressive action from the central bank to stop inflation getting out of control, but others will be worried that too big a rate hike is inappropriate for consumers and businesses already under financial pressure.
“The housing market is already feeling the impact of higher rates as property prices come down. Nationwide’s latest survey shows the first decline in UK house prices in 15 months as higher borrowing costs make moving house unaffordable for many people.
“Interestingly, banking stocks moved higher on the news. Banks can earn more money when interest rates are going up, and in theory lower property prices act as a support for mortgage lending. Bank shares might also be extending gains seen yesterday on reports that the government wouldn’t impose a windfall tax on the sector. However, banks still face a negative issue in that higher interest rates will put even more pressure on household finances and raise the prospect of more bad debts on loans.
“This strength in banks’ share prices gave support to the FTSE 100 alongside big moves from miners, insurers, and retailers. In fact, most of the index’s constituents were in positive territory with only three fallers: Bill Ackman’s Pershing Square Holdings investment vehicle, together with BP and Rentokil which both eased back on their latest results.”