The Bank of England has widened the scope of its daily gilt purchase operations to include the purchase of index-linked gilts after a surge in real yields on Monday. Once again, the FPC is not trying to prevent a rise in Gilt yields (real or nominal), but merely stem the speed of the increases.
Yesterday’s price action in gilts may partly reflect LDI and derivatives, but ultimately it is a judgement on the underlying value of government bonds. There is a real risk that gilt yields will spike higher next week, triggering further distress selling of illiquid assets and even deeper discounts.
Real yields are rising because the public sector finances are not on a sustainable path. Unless the UK government gets control of the public finances, there is little reason to assume that longer-dated gilt yields will fall.
According to figures released today, the IFS sees fiscal tightening of £62bn in 2026-27 required to stabilise debt as a fraction of national income. It will be very difficult, politically, and economically, to begin to balance the books. Deep cuts to the public sector, after years of austerity between 2010 and 2019, will likely constitute a negative supply shock, reducing the long-term growth path of the economy if it exacerbates existing health inequities.
The number of individuals economically inactive because of long-term illness has increased to a record high. Labour market participation rates may continue to drift lower, putting further downward pressure on unemployment rate, which has fallen to 3.50% according to figures released this morning. The y/y for nominal average weekly earnings (ex-bonuses) in the private sector accelerated to 6.4%.
