The pound scraped towards week’s lows but gilts outperformed other European sovereign bonds for a third day running as financial markets reacted to chaos in parliament.
After a subdued session in London yesterday, turmoil returned on the political front overnight as Home Secretary Suella Braverman stepped down, with a resignation letter that suggested the Prime Minister should go too, saying “the business of government relies upon people accepting responsibility for their mistakes”.
Amid growing lack of confidence within her own party, odds on Liz Truss departing 10 Downing Street before the end of the year continued to fall.
Anticipating her grip on power loosening since Jeremy Hunt was made Chancellor and performed stretching U-0turns on most of her recently proposed policies, gilt yields continued to fall to levels seen before the catastrophic ‘mini’ Budget at the end of last month.
“When it comes to policy errors, the current UK government leads the pack and despite the best efforts of new Chancellor Jeremy Hunt, the UK is struggling to regain lost fiscal credibility,” said ING’s UK head of research Chris Turner.
“The UK's five-year sovereign CDS is still trading above 40bp compared to levels nearer 25bp when PM Liz Truss took charge.”
But Deutsche Bank’s Jim Reid noted that gilts outperformed other European sovereign bonds as markets look forward to the government’s fiscal announcement on October 31.
He noted the outperformance was particularly noticeable among long-dated gilts, with yields on 30-year gilts down 31.9 basis points (bps) after the Bank of England’s announcement the previous evening that their fourth-quarter gilt sales as part of quantitative tightening would only involve short- and medium-maturity gilts, rather than long-dated ones.
“To be fair though, gilts rallied right across the curve, and that came in spite of the latest UK inflation data for September,” Reid said, following CPI rising back up to its level in July while core inflation continued to accelerate to a 30-year high.
Sterling was down 0.15% against the dollar at US$1.1196 and 0.3% versus the euro at £0.8735.
Odds on Truss departing before the end of the year backed into 1/7 from 4/6 with bookmaker William Hill.
Spokesperson Lee Phelps, said: “There had been some gentle support at the start of the week for Liz Truss to remain as PM for the year, but since Suella Braverman departed as home secretary the tables have quickly turned and she’s been heavily backed to leave in 2022.
“On Wednesday, Truss could be backed at generous odds of 4/6 to be gone before 2023, but the weight of money today has left her odds of leaving this year plummeting down to a highly likely 1/7.
“As things stand, the betting [suggests] the writing is on the wall for Truss and her departure could be imminent.”
BoE flow
While Hunt's reassurance for markets has mainly been around rowing back on government spending, Truss confirmed yesterday that she was committed to increasing state pension payments in line with the level of inflation.
On Wednesday HM Treasury indicated that £11.2bn has been set aside to cover losses in the BoE's quantitative easing (QE) bond-buying portfolio - the asset purchase facility (APF) - reversing the flow of cash seen in recent years.
Treasury minister Andrew Griffith told parliament: “To date, the APF has transferred circa £120bn of excess cash to HMT from interest payments on purchased gilts. As QE is unwound and gilts are sold back into the market, this cash flow is expected to reverse.”
He said the reversal is likely from October, as the Bank gears up to sell bonds for the first time.