Experts say Truss must calm Gilt Markets.

Experts say Truss must calm Gilt Markets.

After Liz Truss was elected as the new leader of the Conservative Party, U.K. government bonds continued to be under pressure with little indication of reprieve, and analysts cautioned that her policy initiatives will be essential to calming the roiled gilts market and reining in skyrocketing public borrowing rates.

After the worst sell-off in UK government bonds – also known as gilts – since 1994 occurred just last month, the cost of borrowing money for the government has skyrocketed, and the incoming prime minister will take office with even more problems for the deteriorating public finances.

The fall in gilt prices, which indicates an increase in the yield – or interest rate – levied on them, was caused by worries over the economic and political prospects of Britain. This, in turn, led to high costs for the government to borrow money.

The new prime minister will find themselves in the precarious position of having to choose between the two equally undesirable outcomes—inflation on the one hand, and recession on the other.

After Ms. Truss was announced as the new leader of the Conservative Party, the yield on 10-year gilts, which is a proxy for the effective interest rate on public borrowing, edged slightly lower. However, the yield still hovers perilously high to the 3% level, which has not been seen since the beginning of 2014. At the time of writing, the yield was 2.94%.

After Liz Truss was elected as the new leader of the Conservative Party, U.K. government bonds continued to be under pressure with little indication of reprieve, and analysts cautioned that her policy initiatives will be essential to calming the roiled gilts market and reining in skyrocketing public borrowing rates.

After the worst sell-off in UK government bonds – also known as gilts – since 1994 occurred just last month, the cost of borrowing money for the government has skyrocketed, and the incoming prime minister will take office with even more problems for the deteriorating public finances.

The fall in gilt prices, which indicates an increase in the yield – or interest rate – levied on them, was caused by worries over the economic and political prospects of Britain. This, in turn, led to high costs for the administration to borrow money.

The new prime minister will find themselves in the precarious position of having to choose between the two equally undesirable outcomes—inflation on the one hand, and unemployment on the other.

After Ms. Truss was officially confirmed as the new leader of the Conservative Party, the yield on 10-year gilts, which is a proxy for the effective interest rate on government debt, edged slightly lower. However, the yield still hovers uncomfortably high to the 3% level, which has not been seen since the beginning of 2014. At the time of writing, the yield was 2.94%.

Russ Mould, investment director at AJ Bell, made the following observation: “Financial markets show their faith – or lack of it – in a country and its economic and political prospects through how much they charge it to borrow and how they value its currency.”

“In each instance, traders and investors are already withdrawing their capital, most likely due to the fact that they do not like what they see.”

He cautioned that if Ms. Truss is unable to put a stop to the sale of gilts, she may discover that her ambitions for significant tax cuts are derailed.

Mr. Mould explained that the increase in the yields on 10-year gilts is “in acknowledgement of the surge in inflation, as well as the Bank of England’s tilt to rising interest rates and toward quantitative tightening.”

“This adds to the interest payment that the government must pay on its £2.4 trillion debt and perhaps limits the possibility for spending cuts or tax reductions.”

The fear is that rather than bringing the economy out of recession, the policies of Liz Truss risk a protracted period of stagflation. This is the anxiety that has been circulating.

He continued by saying, “The newly appointed prime minister will find themselves potentially stuck between the lesser of two evils of inflation on one side and recession on the other.” [Citation needed]

“If the credit intermediaries like what they hear, then it may help to maintain gilt yields in check, which in turn may allow the yield curve to steepen and the pound to rally.”

However, Susannah Streeter, a senior financial and markets analyst at Hargreaves Lansdown, stated that bond markets are scared of what Ms. Truss would unleash in her attempt to prop up the economy in the United Kingdom.

She made the following statement: “The danger is that, far from dragging the economy out of recession, the policies of Liz Truss risk a lengthy period of stagflation.” [Citation needed]

It’s possible that slashing taxes as prime minister might go over well with members of the Conservative Party, but doing so would be a risky plan for the long-term health of the economy.

 

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