UK government bonds (gilts) are in focus today with the Bank of England set to end its market intervention at 4.30pm BST. After a sharp selloff on Wednesday, they have rallied over the last 24 hours on hopes of changes to the government’s fiscal plans, sending yields lower (and thereby reducing government borrowing costs).
Neil Wilson, chief market analyst at Markets.com, says: “Gilt yields fell as investors speculated Truss and Kwarteng will be forced into a humiliating U-turn on tax cuts. There is not the same fear as there was a couple of days ago when Andrew Bailey laid down the law and said funds have three days to get their house in order.
“Given the Bank is maintaining a hard line, we think that the market is moving on expectations that the government will back down or seek to soothe markets somehow. Could this be a false hope? Kwarteng and Truss are thus far holding the line and we only have vague speculation about a U-turn. The political reality, however, will bite sooner or later. I think this weekend will be ‘interesting’.
“Kwarteng is flying back from Washington early to speak to Truss – he could be made the fall guy, which he could hardly complain about. What kind of reprieve this gives Truss – who faces a potential coup from her own party – is hard to see. But markets look a little calmer this morning – helped in no small measure by the risk-on rally sparked on Wall Street yesterday despite a hot inflation report.”