UK Government Bond Yields Take to the Skies after Chancellor's Fiscal Statement

"The DMO’s Net Financing Requirement (NFR) for 2022-23 is rising by £72.4 billion to £234.1 billion following the publication today of the Government’s Growth Plan," - UK Debt Management Office.

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UK government bond yields rose by double-digit percentages in some cases on Friday as the sovereign debt market responded to a budget-like announcement from Chancellor Kwasi Kwarteng, which is expected to see the government seeking to raise around £234.1BN from the markets this year.

Yields on 02-year government bonds were up more than 10% and at their highest levels since soon after the 2008 financial crisis in the wake of Friday's announcement while other yields like the 10-year also rose sharply and much more so than other sovereign government borrowing costs.

"Today we are publishing costings of all the measures the Government has taken. And those costings will be incorporated into the OBR’s forecast in the usual way," Chancellor Kwarteng told parliament in a Friday morning speech.

"The House should note that the estimated costs of our energy plans are particularly uncertain, given volatile energy prices. But based on recent prices, the total cost of the energy package, for the six months from October, is expected to be around £60bn," the Chancellor also said.

Above: 02-year and 10-year UK government bond yields shown at 15-minute intervals. 

Friday's package was followed by an announcement from the UK Debt Management Office, an executive agency of HM Treasury, informing the GILT market that it would now look to raise a total of £234.1BN for the current year. 

"The DMO’s Net Financing Requirement (NFR) for 2022-23 is rising by £72.4 billion to £234.1 billion following the publication today of the Government’s Growth Plan," the DMO said in a statement.

The centrepiece of the announcement was an Energy Price Guarantee that will limit the unit price consumers pay for electricity and gas, effectively capping a typical annual household bill at £2,500 and sparing them from further increases that could have taken the average bill as high as £6,500.

This is complemented by a similar scheme for businesses and another for companies operating in the energy markets where exceptionally volatile prices have made things like inventory hedging prohibitively risky in some cases. 

"It is entirely appropriate for the government to use our borrowing powers to fund temporary measures in order to support families and businesses," Chancellor Kwarteng told parliament during a Friday morning speech.

Above: 02-year and 10-year UK government bond yields shown at daily intervals.

"That’s what we did during the Covid-19 pandemicA sizeable intervention was right then and it is right now. The heavy price of inaction would have been far greater than the cost of these schemes," the Chancellor also said. 

While energy price guarantees were the centrepiece, there was also a number of other significant announcements on Friday including a wave of tax cuts the government says will help to meet its newly-adopted target to deliver GDP growth of 2.5% per year. 

These included a decision to scrap earlier planned tax increases, ensuring the UK’s corporate tax rate will remain at 19%, in addition to scrapping earlier planned reductions in investment-related tax discounts that had been set to fall from £1million to £200,000 under the prior government.

An interim increase in Employer National Insurance Contributions and dividends tax are cancelled along with the interim increase in the National Insurance while the controversial Health and Social Care Levy was also scrapped.

In addition, the 45% top rate of income tax was scrapped entirely in favour of a single higher rate of income tax of 40% while the basic rate of income tax was brought down to 19%, effective from April 2023. 

Above: 02-year and 10-year UK government bond yields shown at weekly intervals.

"That means a tax cut for over 31 million people in just a few months’ time. This means we will have one of the most competitive and pro-growth income tax systems in the world. Mr Speaker, For too long in this country, we have indulged in a fight over redistribution. Now, we need to focus on growth, not just how we tax and spend ," the Chancellor said on Friday. 

"We are securing our place in a fiercely competitive global economy with lower rates of corporation tax and lower rates of personal tax. We promised to prioritise growth. We promised a new approach for a new era. We promised, Mr Speaker, to release the enormous potential of this country. Our Growth Plan has delivered all those promises and more," he added.

The announcement came as the UK teeters on the edge of what the Bank of England (BoE) has estimated will be a five-quarter long recession that could run almost as deep as those seen in the late 1980s and early 1990s.

However, it also comes amid a period of high inflation that has led the BoE and many other central banks to lift interest rates sharply and it's possible that these measures, irrespective of what they may or may not do for the economy, will lead to even higher borrowing costs going forward.

Above: 02-year and 10-year UK government bond yields shown at monthly intervals.