Gilt market questions how the Downing Street “magic money tree” will be funded

23 September 2022  
1 min read

Commenting on the UK Government’s mini budget, RLAM Head of Rates and Cash, Craig Inches, said:

“The gilt market had only one focus on the mini budget this morning and that was how will the Downing Street “magic money tree” be funded?

“The Government’s decision to naked short the gas market at the same time as cutting National Insurance tax, stamp duty and the shock surprise of abolishing the top rate of Income tax will likely see the debt to GDP ratio skyrocket above 100% in the coming years. The Chancellor announced that this increase is to be funded by an additional 72bn of UK Government debt that piles on top of an already very heavy supply schedule for the debt management office.

“In normal times when a central bank is raising interest rates the economy is usually growing strongly, tax receipts are high and the current account is likely to be moving into surplus, therefore debt issuance would be declining. However, the UK finds itself in the uneasy position of dealing with eye watering inflation and declining or recessionary growth whilst their currency is being annihilated. All of which is not being helped by an indecisive central bank that is woefully behind the curve and reluctantly raising rates to deal with inflation not seen since the 70s.

“The combination of this outlook with a projected supply in excess of 234bn (with an additional 100bn of Quantitative Tightening on top of this) will see gilt yields continue to rise aggressively, as investors demand a higher yield to compensate them for term, inflation and downgrade risk in an environment of ever increasing volatility. We have been of the view for some time that gilt yields will rise and the UK will underperform its global peers. Today’s mini budget rubber stamps this view.”

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About Royal London Asset Management (RLAM):

Established in 1988, Royal London Asset Management (RLAM) is one of the UK's leading fund management companies, providing investment management solutions to both wholesale and institutional clients such as not-for-profit organisations, local authorities and the insurance sector.

RLAM manages £150 billion of assets as at 30 June 2022. It invests in all major asset classes including UK and overseas equities, government bonds, investment grade and high yield corporate bonds, property and cash.

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Issued August 2022 by Royal London Asset Management Limited, registered in England and Wales number 2244297; authorised and regulated by the Financial Conduct Authority. Registered Office: 55 Gracechurch Street, London, EC3V 0RL.

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