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UK gilts in sharp focus ahead of looming deadline

by LLB Reporter
14th Oct 22 10:52 am

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 governmentโ€™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 โ€˜interestingโ€™.

“Kwarteng is flying back from Washington early to speak to Truss โ€“ he could be made the fall guy, which he could hardly complain about. What kind of reprieve this gives Truss โ€“ who faces a potential coup from her own party โ€“ is hard to see. But markets look a little calmer this morning โ€“ helped in no small measure by the risk-on rally sparked on Wall Street yesterday despite a hot inflation report.”

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