UK borrowing costs fall ahead of Hunt’s mini budget reversal

UK borrowing costs scaled lower today ahead of new chancellor Jeremy Hunt rolling back nearly all of prime minister Liz Truss’s mini budget.

The yield on the 30-year UK gilt, which has suffered heavy selling since the mini budget last month, fell 30 basis points to 4.47 per cent.

Rates on the 2-year and 10-year UK gilts also dropped sharply. Yields and prices move inversely.

The pound strengthened nearly one per cent against the US dollar.

This morning, the treasury announced Hunt has brought forward his fiscal statement from 31 October to this afternoon in a bid to tame market turmoil.

Hunt is expected to reverse pretty much all of Truss’s mini budget in which she and her former chancellor, Kwasi Kwartreng, launched £45bn of unfunded tax cuts and ramped up government borrowing.

Truss sacked Kwarteng last Friday and parachuted Hunt into Number 11.

Since the announcement on 23 September, UK markets have been extremely choppy. UK borrowing costs climbed to their highest level in over 20 years and the pound hit a record low against the US dollar.

Yield on 30-year UK gilt dropped today

Heavy selling in the bond market forced the Bank of England to set up a £65bn emergency support scheme to prevent a fire sale dynamic erupting in the pensions sector.

Pensions have invested heavily in liability driven investment (LDI) funds, which were forced to ditch bonds rapidly to repay creditors to cover losses, pushing yields higher.

Markets were also seemingly holding up well on the first day of the end of the Bank’s temporary bond purchase scheme.

Truss’s decision to launch the mini budget without an independent assessment from the Office for Budget Responsibility (OBR) on the impact on the public finances from the tax cuts and borrowing splurge.

The OBR has reportedly estimated the government is facing an around £70bn hole in the public finances caused by the mini budget.

Hunt is expected to push back plans to cut the basic rate of income tax by 1p. Last week, Truss was forced into a second embarrassing U-turn and ditched plans to reverse the six percentage point corporation tax rise.

She had already approved binning plans to get rid of the top 45p of income tax.

Hunt and Truss will have to cut real government by 4.5 per cent over the next few years to stabilise the UK’s debt, two percentage points more worth of cuts that former prime minister David Cameron and ex chancellor George Osborne oversaw during the austerity years after the financial crisis, according to Samuel Tombs chief UK economist at Pantheon Macroeconomics.

The UK will tip into a recession driven by lenders passing on higher rates in the debt markets to consumers through raising mortgage costs, Tombs added.