Bond investors are continuing to dump gilts this afternoon after Reeves’ borrowing plans proved to be higher than expected, which is rapidly generating a sterling risk premium.
Alongside a jump in gilt yields, the pound immediately swung 0.6% to the downside at around 1:30pm GMT.
As per the graph above, GBP/USD is moving in the opposite direction to its interest rate differential thanks to a ‘bad’ rise in yields, owing to what the market now appears to have concluded are overextended borrowing and spending plans in the budget.
The OBR reckons that the net effect is an average of over £30bn a year in increased gilt issuance over the next five years, and a total supply of nearly £300bn in this fiscal year.
Yields have risen over the past couple of days in response to the increased bond supply, but the move has intensified over the course of this afternoon. The volatility in the gilt market has been extraordinary, with the 10-year yield up 30bps in the past 24 hours alone.”
