Ultimately, the Chancellor Jeremy Hunt was able to do no more than steady the Gilt market when he took over the reins back in October of last year. Tough political choices regarding the public finances were eschewed, and the bond market is casting its judgement.
The rally in Gilts following the mini-budget crisis lured the BoE into complacency too. The recent acceleration in services prices is notable, but unsurprising. The 3-month annualised rate for the services CPI (seasonally adjusted) surged to 9.95%, the highest since June 1991. Services inflation has not peaked yet, it seems.
Failure to get a grip on inflation continues to contribute to the deterioration in the PSNB ex, with the RPI exceeding expectations time and time again, still up 11.4% y/y in April. The 12-month moving total for interest payments hit a record £110bn in the twelve months to April. The PSNB ex widened to £148.95bn over this period.
Ratings agencies are finally coming around to the view that demographics will raise government borrowing costs. Ageing populations have placed public finances on increasingly unsustainable trajectories.
Indeed, the UK may be warning for the US. Real yields have been under significant upward pressure. The 20-year spot rate for index-linked gilts rose to 1.18% on May 23rd. This is not yet at the high of October 11th 2022 (1.69%), but as suggested on Monday, there is further room to run.
The 30-year nominal UK Gilt yield jumped to 4.62% this morning (9am UK time). The 10-year yield was up to 4.30%. The 2-year Gilt yield was up to 4.43%, not far off the peak of 4.61% on September 27th, 2022.
