UK bond market sell-off to have 'wide ranging repercussions' as GBP fall continues

The Pound has sold-off again this morning amid heightened fears over the rout in UK bond markets. While part of the move can be ascribed to the fixed income sell-off globally, the gyrations seen in UK gilts have been extreme, with investors particularly concerned over the outlook for Britain’s economy and the state of public finances.

This is a damning indictment of Labour’s fiscal policies, particularly the hike to employer NI contributions, which businesses have already warned will lead to higher prices and a worsening in labour market conditions.

We see wide ranging repercussions of this bond market sell-off. On the one hand, weak demand for UK debt raises the risk of either government spending cuts or further tax hikes to balance the country’s finances, neither of which would be positive for growth.

Elevated gilt yields are also likely to be reflected in higher mortgage rates, which would provide a further squeeze on household disposable incomes.

These worries have placed a high premium on UK assets, and we would not rule out additional downside for sterling as a result.