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Gilt market questions how the Downing Street 'magic money tree' will be funded

23rd September 2022

Commenting on the UK government’s mini budget, RLAM Head of Rates and Cash, Craig Inches, said:

“The gilt market had only one focus on the mini budget this morning and that was how will the Downing Street 'magic money tree' be funded?

“The Government’s decision to naked short the gas market at the same time as cutting National Insurance tax, stamp duty and the shock surprise of abolishing the top rate of Income tax will likely see the debt to GDP ratio skyrocket above 100% in the coming years. The Chancellor announced that this increase is to be funded by an additional £72bn of UK Government debt that piles on top of an already very heavy supply schedule for the debt management office.

“In normal times when a central bank is raising interest rates the economy is usually growing strongly, tax receipts are high and the current account is likely to be moving into surplus, therefore debt issuance would be declining. However, the UK finds itself in the uneasy position of dealing with eye watering inflation and declining or recessionary growth whilst their currency is being annihilated. All of which is not being helped by an indecisive central bank that is woefully behind the curve and reluctantly raising rates to deal with inflation not seen since the '70s.

“The combination of this outlook with a projected supply in excess of £234bn (with an additional £100bn of Quantitative Tightening on top of this) will see gilt yields continue to rise aggressively, as investors demand a higher yield to compensate them for term, inflation and downgrade risk in an environment of ever increasing volatility. We have been of the view for some time that gilt yields will rise and the UK will underperform its global peers. Today’s mini budget rubber stamps this view.”


The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.