By Kathleen Brooks, research director at XTB
· Why the Gilt market is favourable to Reeves’ tax plan
· A good summer has seen UK yields normalize
· The pound is the UK’s punching bag
The market has had time to digest the unusual press conference from the UK Chancellor earlier this morning, and aside from the UK taxpayer, the biggest victim is the pound.
GBP/USD is one of the weaker currencies in the G10 FX space today and is down 0.5%. It has reached an intraday low of $1.3059, after falling below $1.31 as Reeves started speaking.
The knock to the pound contrasts with the Gilt market, as bonds bounce on Tuesday. UK Gilt prices are higher across the board, while yields are falling. UK 10-year yields are lower by 2 bps, while 30-year yields are down by a similar amount. Gilts have been a major outperformer over the past 3 months, and in the past month, in particular. The 30-year Gilt yield is lower by 36bps in the past month and the 10-year yield is lower by 31bps.
Why the Gilt market is favourable to Reeves’ tax plan
This does not mean that the Gilt market is giving the Chancellor’s plans for tax rises without meaningful public sector spending cuts or cuts to the benefits bill, a ringing endorsement. Instead, a rise in the tax bace could make it easier for the Chancellor to build bigger fiscal headroom, the amount that the country has to spare if a crisis hits.
The bond market is happy with the government building up the UK’s rainy-day fund, as it makes the debt we need them to buy safer. The question now is, will Gilt yields continue to fall?
A good summer has seen UK yields normalize
As you can see in the chart below, which shows UK, German, French and US 10-year sovereign bond yields normalized to show how they move together, the UK yield has been falling at a faster rate than French or German yields since the summer months.
This suggests that yields have normalized somewhat, and the next leg lower for UK Gilt yields could depend on the tone at this week’s BOE meeting.
The pound is the UK’s punching bag
The pound is a harder sell at this point since tax rises could damage the UK’s growth prospects.
Chart 1: UK, German, French and US 10-year sovereign bond yields
Source: XTB and Bloomberg
XTB CY-RISK DECLARATION: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
XTB UK-RISK DECLARATION: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 72% of retail investor accounts lose money when trading CFDs with XTB Limited UK. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
XTB is a trademark of XTB Group. XTB Group includes but is not limited to following entities:
X-Trade Brokers DM SA is authorised and regulated by the Komisja Nadzoru Finansowego (KNF) in Poland
XTB Limited (UK) is authorised and regulated by the Financial Conduct Authority in United Kingdom (License No. FRN 522157)
XTB Limited (CY) is authorized and regulated by the Cyprus Securities and Exchange Commission in Cyprus. (License No.169/12)
Clients who opened an account from the 1st of January 2021 and are not residing in the UK, are clients of XTB Limited CY.