Gilt yield increases raise the risk of autumn tax hikes

Britain's economy continues to expand at a surprisingly resilient pace, even as the labour market keeps deteriorating and borrowing costs continue to rise. One-month implied volatility in GBP has fallen to more than twelve year lows, though we expect that to prove a floor for some time given brewing budget jitters and the fact that August tends to be a low volatility month across financial markets.

Andy Burnham finally made his long-awaited debut in Prime Ministerˇs Questions on Tuesday, though it was remarks from the PMˇs official spokesman earlier in the day - where he insisted that the government would stick to the fiscal rules with an unspecified headroom to spare - that carried more weight for markets.

The big headache for politicians is the continued sell off and underperformance in gilts, which have seen the 10-year yield surge to an 18-year high above 5.2%. This rise in yields, which will eat directly into the government's fiscal headroom, raises the risk of tax hikes in the autumn, even before accounting for any additional spending increases that Burnham seems likely to pursue.