Gilts: Investors aren’t scared of UK’s ballooning deficit – yet

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The past two weeks of US Bitcoin spot ETF inflows were less than disappointing. The bullish camp suspected that after the halving, the ETFs would see a surge of inflows. The bears believed it would be a sell the news event, with the halving’s bullish effects already exaggeratedly priced. So far, it seems the bears have been correct, but with the latest ETF inflows, could the correction be complete and the market sentiment shifting?
The past two weeks of US Bitcoin spot ETF inflows were less than disappointing. The bullish camp suspected that after the halving, the ETFs would see a surge of inflows. The bears believed it would be a sell the news event, with the halving’s bullish effects already exaggeratedly priced. So far, it seems the bears have been correct, but with the latest ETF inflows, could the correction be complete and the market sentiment shifting?

Investors have flocked to UK government debt, hoping to lock in higher yields before the Bank of England starts lowering interest rates later this year.

The UK Debt Management Office received orders of more than £55bn for its 30-year inflation-linked bond, a record for the security.

This followed another massively oversubscribed auction yesterday when the DMO’s sale of £3.75bn of 10-year gilts was oversubscribed by 3.61 times.

The Treasury announced plans in the Spring Budget to borrow more from the private sector than ever before.

The government announced plans to sell £265bn worth of gilts last week, the highest ever outside the pandemic, thanks to its difficult fiscal position and the need to roll over maturing debt.

Higher gilt sales from the DMO will coincide with the Bank of England winding down its stock of gilts acquired during the various bouts of quantitative easing. The Bank is planning to offload £100bn in gilts between October 2023 and November 2024.

Analysts are concerned that this might force up the cost of borrowing, given the sheer quantity of government debt the private sector will have to absorb.

Economists at Nomura think private sector investors will be asked to buy more gilts in the next two years than in the previous nine combined.

“The question is: what price will investors demand in order to hold gilts?” analysts at the bank asked.

However, given the fact that interest rates are expected to start falling later this year, investors are looking to lock in higher yields while they still can.

Markets think the Bank of England will start cutting interest rates in the summer, with three rate cuts priced in across the year.