UK government bonds and pound rally ahead of Chancellor’s emergency budget plans

The battered pound and UK government bonds rallied on Monday ahead of new Chancellor Jeremy Hunt’s emergency statement to calm the chaos in the financial markets.

Yields on 30-year and 10-year government bonds – also known as gilts – tumbled by around 8% in early trading as the Chancellor’s announcement that he will bring forward a fiscal statement soothed volatile markets.

Sterling leapt more than 1% to 1.131 US dollars at one stage after the news, which was unveiled before markets opened and ahead of what many feared would be a testing day for the pound and gilts.

There had been worries that the sell-off in gilt markets would resume in earnest on Monday after the Bank of England ended its government bond-buying scheme and after Friday’s corporation tax U-turn failed to ease investor concerns.

The Bank stuck to its guns by ending its emergency gilt-buying programme on Friday despite fears it would see a return to volatile market conditions which sparked a damaging sell-off in gilts that left some pension funds on the verge of collapse.

In a statement also out before market opening on Monday, the central bank said its bond-buying programme had “enabled a significant increase in the resilience of the sector” after the mini-budget market chaos had left some pension funds on the brink of collapse.

The FTSE 100 Index was also higher in early trading on Monday, up 0.4% at 6883.8, after a turbulent previous week that saw it reach a fresh 18-month at one stage.

Mr Hunt’s move also comes as speculation swirls over Liz Truss’s future as Prime Minister after a disastrous start to her tenure that has already forced her to sack former Chancellor Kwasi Kwarteng.

While markets reacted positively to news that Mr Hunt is taking urgent action on the Government’s fiscal plans, experts warned over further volatility ahead.

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said: “Today’s developments may hold off a fresh assault on government borrowing costs by the bond vigilantes standing by in the UK gilt market, but it could only be a temporary reprieve.

“Trussenomics may have been ripped up and fed to the shredder but the author of the big gamble remains in power, and has the final say on the direction of travel.

“Investors are craving more stability but, given the flip-flopping we’ve had so far in her super-short tenure, economic policy uncertainty remains and that’s likely to be the key driver in the bond markets and on foreign exchange desks.”

Falling gilt yields will come as a relief to the Government, as it was the sell-off in this market that threatened to trigger a mini financial crisis in the UK.

When government bond prices fall, their yields rise and at one stage jumped to levels not seen for 20 years in the aftermath of the budget market mayhem.

The Bank launched a scheme to purchase up to £65 billion of UK government bonds, called gilts, in order to help stabilise prices amid concerns over unfunded tax cuts in the former chancellor’s plans.

Around £19.3 billion worth of gilts were purchased in total by the Bank through the programme.