UK borrowing costs fall below US, Italian and Greek equivalents after Hunt mini-budget reversal

UK borrowing costs have dropped below their European and transatlantic counterparts after new chancellor Jeremy Hunt tore up prime minister Liz Truss’s tax cutting mini-budget.

Since Truss and her former chancellor Kwasi Kwarteng decided to launch £45bn of unfunded tax cuts in a bid to boost economic growth, gilt yields have shot higher.

Rates on the 30-year gilt briefly hit their highest level in over 20 years after the mini-budget on 23 September.

Steep upward moves on Britain’s debt markets pushed yields above equivalent instruments distributed by the Italian and Greek governments.

But, investors have been shored up by Hunt trying to plug a more than £70bn hole in the public finances by reversing nearly all of Truss’s tax plans.

Rates on the 10-year gilt hit 3.98 per cent today, a shade lower than the return on the 10-year US treasury, around 70 basis points lower than the Italian equivalent and a whole percentage point lower than the Greek 10-year bond.

Yields on the 10-year gilt are also trading slightly lower than the US 10-year treasury.

Yield on 10-year gilt

Yields and prices move inversely.

Differences in yields between countries’ debt – or spreads – are seen by investors as a sign of the risk premium attached to an economy.

Traders were seemingly assigning a high risk premium to the UK economy after Truss launched the largest amount of tax cuts since the early 1970s.

She also decided to push ahead with the fiscal plans without an independent assessment from the Office for Budget Responsibility, adding to investors’ concerns about the direction of British government policy.

Debt yields have been soaring around the world this year, driven by historic high inflation forcing central banks to tighten monetary policy rapidly.

The US Federal Reserve has lifted borrowing costs 75 basis points three times in a row and is expected to do so again next month.

The Bank of England has hiked rates seven times in a row including two back-to-back 50 basis point rises.

Investors think governor Andrew Bailey and co could sign off a 100 basis point rise on 3 November. 

The European Central Bank has also lifted rates steeply.

The pound, which tumbled to the lowest level on record against the US dollar after the mini-budget, has regained ground on the greenback in recent weeks. 

It climbed over two per cent yesterday, but dropped around 0.15 per cent today.