UK government borrowing costs fell sharply and the pound rose after Jeremy Hunt announced he would unveil some of his debt-reduction plans in a bid to smooth over jitters in financial markets.
In a surprise announcement early on Monday, the chancellor said he would make a statement to the House of Commons to announce some of the measures in the government’s medium-term fiscal plan two weeks early.
The yield – or interest rate – on 30-year UK government bonds fell more than 30 basis points in early trade on Monday, with borrowing costs falling across the board for short- and long-term bonds.
The pound rose about 1 percent against the dollar, trading just below $1.13 on global currency markets.
“So far gilt markets have reacted positively this morning to the latest fiscal press reports,” said James Smith, economist at Dutch bank ING. “But at the end of the day, the monetary value of the deficit reduction measures to be announced today matters, as does the message sent about the importance of fiscal sustainability.”
The drop in bond yields comes despite the Bank of England lifting its emergency intervention late last week after the central bank insisted it would withdraw its temporary support measure.
Bond yield chart
Despite the fall in yields – which is feeding back on bond prices – the UK government’s borrowing costs still remain higher than before Kwasi Kwarteng’s ill-received mini-budget a month ago.
After falling on Monday, the yield remained at 4.4%, well above the 3.8% level seen the day before the former chancellor announced a package of unfunded tax cuts designed to boost the economy worth £45bn In the ensuing market chaos, rates peaked at around 5% before the bank was forced to intervene.
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Tanim Islam, market strategist at business payments firm Equals Money, said: “In early trading, the pound rose on newfound confidence in the new chancellor and rumors that Truss had been ousted.
“Today will be the first day that the Bank of England will no longer intervene in the gilt market. Gold is up so far this morning, with yields falling on Hunt’s changes to fiscal policy and market activity that will please the Bank of England.”
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