Analysis: Pound slump is bad, but UK bond market is carnage

Jeremy Hunt has said the Conservatives will cut taxes again in the autumn "if we can", with some reports suggesting he's considering another 2p cut to National Insurance.
Jeremy Hunt has said the Conservatives will cut taxes again in the autumn "if we can", with some reports suggesting he's considering another 2p cut to National Insurance.

Focus on the pound today was understandable, from a media perspective.

“Pound tumbles to record low against US dollar” is a great headline.

Analysts at investment bank Nomura said sterling may plunge to $0.95 in the first three months of next year.

Blimey.

But, it’s the turmoil in the UK bond markets that was the real story.

When the government does not make enough money in tax revenue to cover its spending, it has to borrow to bridge the gap.

Last week, the government reduced its tax revenue by around £45bn. It did not cut spending.

So, markets need a greater return to absorb the sharp increase in borrowing. It’s called a price adjustment. 

If prices drop, yields go higher. If they rise, yields fall. 

Today, returns on every UK government bond fired substantially higher. On the 2-year bond, they scaled 60 basis points higher to 4.5 per cent, the highest since the financial crisis.

This should strengthen the pound by making it more attractive to buy UK assets. It didn’t.

That’s worrying. It indicates investors do not want to park their money in Britain.

It seems those kind strangers former Bank governor Mark Carney was fond of are losing their patience.