The pound has fallen to a 14-month low against the US dollar as the sell-off in the bond market fuelled investors’ anxiety over UK assets and piled further pressure on the chancellor, Rachel Reeves.
As the bond sell-off gathered steam, sterling lost a cent against the US dollar, extending recent losses, falling to about $1.226.
UK borrowing costs rose again on Thursday morning, despite the government’s efforts to calm the markets. Reeves took the rare step of issuing a public statement for the second successive day on Wednesday night, insisting she has an “iron grip” on the public finances.
Michael Brown, a senior research strategist at the brokerage Pepperstone, has warned that “things are also getting rather ugly” in the UK.
He said the dynamic of bond yields moving higher while the currency fell was a sign of investors “losing confidence in the government in question’s ability to exert control over the fiscal backdrop. We’re not at the Truss/Kwarteng stage just yet, but things are clearly on very shaky ground indeed,” Brown added, referring to the mini-budget put forward by the former prime minister Liz Truss and the then chancellor, Kwasi Kwarteng, in September 2022 that triggered a bond sell-off and turmoil in financial markets.
On Thursday morning, the yield, or interest rate, on benchmark 10-year UK debt rose by as much as 12 basis points – or 0.12 percentage points – in early trading in London to 4.921%, the highest since 2008, before easing slightly. Thirty-year bond yields, which hit 28-year highs this week, are rising again, too – up by more than 10 basis points to 5.474%.
Chris Turner, the global head of markets at ING, said: “Our best understanding of yesterday’s sterling sell-off is that the global bond market sell-off touched a raw nerve in the gilt market and that then the gilt spread widening prompted investors to cut back on overweight sterling positioning.”
In recent weeks, investors had been buying sterling as a counterweight to the strong dollar.
“Investors had felt that sterling could best withstand the overriding strong dollar trend,” Turner said, but the gilt sell-off has dented that confidence in sterling and traders’ long bets on the pound – betting that the currency will rise – could be pared as “investors reassess sterling exceptionalism”.
Despite recent losses, the pound is still comfortably above its record low after the 2022 mini-budget, when it plunged to near parity with the dollar.
The former Bank of England policymaker Martin Weale has suggested that 1976, rather than 2022, provided a better comparison with the current market anxiety.
In 1976, the plummeting value of the pound forced the Labour government to turn to the International Monetary Fund for a bailout, with strict spending cuts attached.
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Weale, a professor of economics at King’s College London, told Bloomberg: “We haven’t really seen the toxic combination of a sharp fall in sterling and long-term interest rates going up since 1976. That led to the IMF bailout. So far, we are not in that position but it must be one of the chancellor’s nightmares.”
Separately, a survey from the Bank of England showed more than half of UK firms are planning to raise prices or cut jobs in response to Reeves’s increase in employers’ national insurance contributions (NICs) from April.
The Bank polled chief financial officers from small, medium and large UK businesses, and asked how they expected to respond to the increase in employer NICs announced in October’s budget.
The survey found that 61% expected to lower profit margins, 54% expected to raise prices, 53% expected lower employment and 39% expected to pay lower wages than they otherwise would have done.
Companies were allowed to select more than one option, the Bank said.
