Foreign investors sold off UK government bonds at the fastest pace on record over the three months to November despite the Prime Minister Rishi Sunak’s efforts to stabilize the economy after a disastrous September fiscal plan.
(Bloomberg) — Foreign investors sold off UK government bonds at the fastest pace on record over the three months to November despite the Prime Minister Rishi Sunak’s efforts to stabilize the economy after a disastrous September fiscal plan.
Figures from the Bank of England show that overseas investors sold a total of £38.4 billion of government debt between September and November, renewing concerns about the weak pound and rising borrowing costs.
Derek Halpenny, head of research at Japan’s MUFG bank, said the three-month average rate of £12.8 billion was the highest since BOE records began in 1982. It was also the first time that foreign investors offloaded gilts for three months running since 2016, when institutions were positioning themselves around the time of the referendum on exiting the European Union.
Foreign investors are among the biggest holders of UK government debt, accounting for almost 30% of the market. Signs that they are shifting out of government bonds, known as gilts, could pose problems for the government in the next financial year, when the Treasury needs to raise more than £300 billion – the second largest remit on record.
At the same time, the BOE plans to sell £40 billion of the gilts it bought under its quantitative easing to stimulate the economy. At the height of the pandemic — the last time the government’s financing remit was larger — the BOE was a net purchaser of gilts.
Halpenny said the apparent loss of foreign institutional confidence “does not bear well when you look forward to the supply of gilts coming.” If concerns about the outlook mount and markets “go back into a broad risk-off episode, sterling is likely to underperform, or investors will demand a higher yield – or a bit of both,” he said.
The impact would be to deepen the cost-of-living crisis, since a weak pound would drive up the cost of imported goods, and higher government bond yields would push up borrowing costs across the economy.
Foreign investors have been net sellers of gilts for four of the past five months, a trend that started in July during the Conservative leadership contest that followed Boris Johnson’s resignation as prime minister. It accelerated in September when his successor, Liz Truss, unveiled £45 billion of unfunded tax cuts, most of which have since been reversed under Sunak.
Truss’s fiscal program triggered a market meltdown that ultimately brought down her government. Sunak, her successor, stabilized the public finances with £55 billion of tax rises and spending cuts. But asset sales by international investors have continued despite his austerity program.
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