U.K. Blunders May Permanently Scar Gilts, JPMorgan Analyst Says
Intermediate U.K. yields will likely price “increased risk premia on a cross-market basis going forward,” said Francis Diamond.
(Bloomberg) -- The gilt market chaos triggered by the government’s fiscal statement last month may have lasting consequences for UK borrowing costs, according to JPMorgan Chase & Co. rates strategist Francis Diamond.
“The disruptive delivery” of the update by Chancellor of the Exchequer Kwasi Kwarteng on Sept. 23, “combined with still lingering uncertainty” around the details and long-term sustainability of his plans “will leave a more permanent scar on GBP rate markets,” Diamond wrote in a note on Monday.
Intermediate UK yields will likely price “increased risk premia on a cross-market basis going forward,” he added.
The call came amid a severe selloff that saw some UK inflation-linked yields surge by the most on record. The Bank of England expanded the scope of its bond purchases on Tuesday to include inflation-linked debt in an effort to avert what it called a “fire sale.”
Yields may continue to rise -- albeit in a more orderly manner -- even though “peak fiscal uncertainty has likely passed,” after the government u-turned in several areas and brought forward its fiscal assessment, Diamond wrote.
Long-dated and inflation-linked bonds were particularly affected by collateral calls favored by defined-benefit pension programs.
Once liability-driven investment “asset managers have delevered and raised cash we would expect demand for long gilt and linkers to materialize,” Diamond wrote. “But this may be several months away.”
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