The pound briefly fell to a 14-month low against the US dollar on Thursday morning after the sell-off in the bond market fuelled investors’ anxiety about UK assets and piled further pressure on the chancellor, Rachel Reeves.
Sterling extended recent losses against the US dollar, falling by a cent at one point, before recovering to trade half a cent down at $1.23.
The sell-off in British government bonds – known as gilts – drove up the yield, or interest rate, paid to those holding them and therefore UK borrowing costs.
However, comments by the chief secretary to the Treasury, Darren Jones, later on Thursday appeared to calm the market. He told the House of Commons that “gilt markets continue to function in an orderly way”, suggesting no need for emergency measures. Yields eased afterwards – reversing the day’s gains.
Jones said: “Underlying demand for the UK’s debt remains strong, with a generally well-diversed investor base.”
His intervention was more successful than that of Reeves the previous night, when she took the rare step of issuing a public statement for the second successive day to insist she had an “iron grip” on the public finances.
The sell-off continued on Thursday morning, with the yield on benchmark 10-year UK debt rising by as much as 0.12 percentage points to 4.921%, the highest since 2008, before easing back again.
Thirty-year bond yields, which hit 26-year highs this week, also rose, by about 0.1 points, before returning to be flat on the day.
Michael Brown, a senior research strategist at the brokerage Pepperstone, said 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 said, referring to the September 2022 budget under the then prime minister, Liz Truss, and her chancellor, Kwasi Kwarteng, that triggered a bond sell-off and turmoil in financial markets.
The increase in servicing government debts could cut into the chancellor’s expected financial headroom, and triggered speculation that she could be forced to announce unplanned austerity measures.
Matthew Amis, an investment manager at abrdn, said he expected Reeves would have broken her own newly drafted fiscal rules when the Office for Budget Responsibility presented its updated forecasts at the end of March, and could announce bigger cuts to government spending.
Chris Turner, the global head of markets at analysts 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 had dented that confidence in sterling and traders’ bets that the currency would rise could be pared back.
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 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.
Weale, a professor of economics at King’s College London, said an IMF bailout looked unlikely, but the UK government “might want an IMF seal of approval [for its policies] if things got much worse than they are”.
The Conservative party and the Liberal Democrats called for Reeves not to travel to China on Thursday, where she is due to spend several days drumming up international investment alongside Andrew Bailey, the governor of the Bank of England.
The Lib Dem leader, Ed Davey, urged the chancellor to make an emergency fiscal statement to parliament cancelling the £25bn increase in employers’ national insurance contributions (NICs) announced for April, to boost economic growth and give the Bank of England more room to bring interest rates down.
Separately, a survey from the Bank of England showed more than half of UK firms were planning to raise prices or cut jobs in response to Reeves’s increase in employers’ 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 to 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.
