The bond market has given a clear verdict on the new UK Government’s tax cuts and borrowing spree. The losses on Gilts have been outsized against a backdrop of a global government bond selloff. The 10-year UK Gilt yield surged to 3.802%, up from 3.179% at the start of the week. The intraday move was 33 basis points. Yields surged across the curve: the 5-year Gilt yield hit 4.06%, up 50 basis points on the day.
The US 10-year Treasury yield also surged to 3.70% yesterday. YCC in Japan is now hanging by a thread. Thursday’s FX intervention was a sign of desperation and signalled an impending shift in the BoJ’s forward guidance and an eventual lifting of the yield cap for 10-year JGBs. Repricing of the 10-year JGB when the cap is forced off will be a major jolt for government bonds globally, adding anywhere between 50 and 100 basis points to longer-dated curves.
Kuroda reiterated at his news conference that there would be no change to the BoJ’s forward guidance “for about two to three years”. The bond market won’t buy this. The BoJ has a price stability target of 2%, which is now being exceeded. The y/y increase in the CPI accelerated from 2.63% in July to 2.98% in August. The 3m/3m annualised change for the seasonally adjusted core CPI (ex-fresh food & energy) increased to 3.11% last month too.
The data so far for September have shown an intensification of price pressures. The y/y for the SRI-Hitotsubashi Consumer-purchase Price Index (ex-tobacco) accelerated from 2.02% to 2.25% (September 20th), the fastest rate of inflation for this index since 2008. And the largest price hikes are yet to come: price rises in October are expected for over 6,500 food items, as well as gas bills and fire insurance premiums.
