Gilts on Wednesday staged their biggest one-day rally since March 2020 after the UK government slashed its planned debt sales this year by nearly £60bn, a much larger cut than markets had anticipated.
A stronger-than-expected economic rebound this year has bolstered tax receipts, leading the government to consistently undershoot borrowing forecasts drawn up in the spring, when the Covid-19 vaccination programme was still in its relatively early stages.
The Debt Management Office spelt out the scale of that reduction alongside chancellor Rishi Sunak’s Budget on Wednesday, cutting its planned government bond sales for the 2021-22 fiscal year to £198.4bn — or £57.8bn less than its April forecast. Markets had been expecting a forecast of only £34bn, according to a Reuters poll of gilt-trading banks.
“This means a lot less supply than the market was anticipating,” said Peter Schaffrik, a strategist at RBC Capital Markets.
Ten-year UK borrowing costs tumbled by 0.13 of a percentage point to a three-week low of 0.98 per cent as gilts rallied, the biggest one-day drop since the market turmoil at the height of the Covid crisis. Bond yields move inversely to prices.
The moves came against the backdrop of a global rally in longer-dated government debt, as investors worry that central banks might overreact to the recent surge in inflation with interest rate rises that threaten to curb the economic recovery.
In the UK, more optimistic growth forecasts from the Office for Budget Responsibility also imply lower gilt sales in the years ahead. That should help to soothe any potential anxiety in markets over the looming end to gilt purchases by the Bank of England in December, along with the possibility that the central bank could begin reducing its £845bn of gilt holdings as soon as March, according to TD Securities strategist Pooja Kumra.
Elsewhere in markets, shares in UK pub companies climbed on Wednesday as Sunak outlined changes to alcohol duties. Detailing “radical” plans to simplify these taxes, the chancellor said higher rates would be aligned with stronger drinks.
Under Sunak’s new strategy, just six duty rates on alcohol will exist — down from 15. Stronger alcohol will face higher taxes but lighter drinks including rosé wine will enjoy lower rates.
Sunak also announced a new “draught relief” scheme, which will entail the application of a lower rate of duty on draught beer and cider.
Shares in JD Wetherspoon rose 5 per cent in response. Shares in pub operator Marston’s gained 6 per cent, Mitchells & Butlers was up 6 per cent, while Young’s gained 2 per cent.
Pub companies were badly knocked in the early stages of the coronavirus pandemic and during subsequent lockdowns. Wednesday afternoon’s ascent took Wetherspoons’ shares roughly flat year-to-date.
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