Budget: Hostile market response as advisor suffers Halloween nightmare | Money news – Uptrends

First things first: Don’t panic.

What you need to know is this. Budget It was not good in the financial markets. In fact, it has fallen as badly as any budget in recent years, with the exception of Liz Truss’s small budget.

The pound is weaker. Government bond yields (basically the interest rate the Treasury pays on its debt) rose.

This is exactly the opposite market reaction to what advisers would like to see after they submit their financial statements to the House of Representatives.

In hindsight, perhaps we shouldn’t be surprised.

After all, the new government has committed itself to much more borrowing than its predecessors – some £140 billion in borrowing in the coming years. This money must be borrowed from somewhere – specifically, the financial markets.

But those financial markets are now re-evaluating how eager they are to lend to the UK.

The result is that the pound has fallen very sharply (the largest two-day drop in the value of trade-weighted sterling in 18 months), and government bond yields – the interest rate paid by the government – ​​have risen sharply.

This all started to take shape shortly after the budget speech, as yields started to rise and the pound started to weaken, just as investors and economists got their hands on the budget documents.

But declines in the pound and rising bond yields accelerated today.

To be perfectly clear, this is not the kind of response any minister wants to see after the Budget – let alone his first Budget in office.

In fact, I can’t remember another Budget that has seen such a hostile market response in so many years – except for one.

That exception is, of course, the Liz Truss/Kwasi Kwarteng mini-budget 2022. And here’s the bright side of the matter Keir Starmer And Rachel Reeves.

The rises in gold yields and the fall in sterling in recent hours and days are still a far cry from what happened in the run-up to the mini-Budget and its aftermath. This does not appear to be a crisis moment for UK markets.

But this is not good news for the government. In fact, it’s pretty terrible. Because the higher borrowing rates on UK debt mean they (well, we) will end up paying much more to service our debt in the years ahead.

This debt is about to swell dramatically due to plans laid out by the Finance Minister this week.

This is where things get particularly sticky Mrs. Reeves.

In those Budget documents, the Office for Budget Responsibility said the Chancellor could see government bond yields rising by about 1.3 percentage points, but then when they exceed that level, the so-called “uplift” she had against her fiscal rules would evaporate.

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In other words, she will break those rules, which, as we remember, are considerably less stringent than those she inherited from Jeremy Hunt.

Which raises the question: Where are those gilded revenues now? How close do they get to the danger zone where the Chancellor ends up breaking her own rules?

Short answer: alarmingly close. Because right now, the five-year yield on government debt (the maturity that the OBR focuses on) is more than halfway into the danger zone – just 56 basis points away from reaching the point where interest costs eat up the debt. No room to move. The Chancellor must avoid breaking her rules.

Now, we are not in the crisis zone yet. Not every movement in currencies and bonds can be attributed to this budget.

Markets are volatile right now. There’s a lot going on: the US elections next week and the Bank of England’s interest rate decision next week.

The advisor can be lucky. Gold yields could stabilize in the coming days. But for now, the UK, with its high levels of public and private debt, and its new government that has just pledged to borrow billions more in the coming years, is under close scrutiny by “bond vigilantes”.

A Halloween nightmare for any advisor.