The yield on UK 10-year government bonds reached 4.48% on Monday afternoon, up slightly from 4.45% on Friday. This increase reflects a sell-off in UK government debt, as traders adjust for higher anticipated borrowing by the UK government. More borrowing typically requires more bond issuance, leading to lower bond prices and higher yields.
Unlike the bond market volatility following the 2022 “mini-budget” under then-Prime Minister Liz Truss and Chancellor Kwasi Kwarteng, recent yield movements have been more subdued. However, the uptick still signals a cautious outlook among investors as the government’s fiscal stance prompts increased issuance of UK debt.
Bank of England Rate Decision Looms
The market is now awaiting the Bank of England’s (BoE) upcoming interest rate decision, with expectations that the BoE will be slower to reduce rates. Senior UK economist Andrew Wishart of Berenberg noted that the BoE may need to acknowledge recent fiscal shifts, as the Office for Budget Responsibility has raised its own rate assumptions by 25 basis points over market expectations in anticipation of a response to fiscal policy adjustments.
“It is customary for the BoE to brush off changes in fiscal policy, but it would have to be tone-deaf to do that this time around,” Wishart said.
US Election Adds to Market Uncertainty
Across the Atlantic, the upcoming US presidential election is adding volatility to global markets. Rising expectations of a potential victory for Republican candidate Donald Trump had recently boosted US bond yields, the dollar, and bitcoin. However, a recent poll showing Democratic candidate Kamala Harris in the lead in Iowa led to a reversal, causing bond yields to drop and easing pressure on stocks.
Eastspring Investments CEO Bill Maldonado commented on the uncertainty, saying, “It’s impossible to call at this point… We’ve heard Trump talking about tariffs and other measures, but do we really know what’s going to get implemented in what manner? It’s almost impossible to position for it.”
Market Reaction and Investor Sentiment
Susannah Streeter, head of money and markets at Hargreaves Lansdown, said investors are bracing for a volatile week ahead, with both the US election and key interest rate decisions in focus. Despite the uncertainty, the FTSE 100 opened in positive territory on Monday, building on gains from Friday’s market rebound.
“As Republicans and Democrats embark on a last-minute surge of campaigning, some of the big Trump ‘plays’ on the markets have lost ground,” Streeter explained, adding that recent polls suggest Harris has gained traction in crucial battleground states.
Streeter also noted that expectations for lower borrowing costs in the US appear strong following disappointing jobs data last week, suggesting the Federal Reserve may move to cut rates in response.
The combination of the BoE’s pending rate decision, increased UK bond issuance, and the unpredictable US election outcome has investors on high alert, with markets likely to respond swiftly to any developments in the coming days.
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