SNAP ANALYSIS: UK "mini-Budget" proves to be anything but for Gilts

Analysis details (10:20)

• UK Chancellor Kwarteng's ironically labelled mini-Budget, which did not merit the publication of fresh OBR forecasts, has seen a number of wide-ranging tax reductions including alterations to Income Tax, Stamp Duty, Land Tax, and Alcohol duties - cuts which are expected to be worth GBP 45bln. In addition to this, the estimated cost of the Energy plan is uncertain at this point in time; but, is likely to be over GBP 60bln for the next six-months, based on current pricing. Note, this estimate covers just the first six-months of support which, for the housing sector, is set to cover a two-year period.


• In wake of the GBP 60bln figure being announced pressure began to make itself known in Gilt Dec'22 moving back down towards the 102.00 mark and then dropping, at first modestly then picking up pace substantially, to below the 101.00 mark as the Chancellor announced further, on face value, erosions to the gov'ts revenue sources.


• Subsequently, the DMO published its financing/issuance requirements for the 2022-23 period which include a net financing requirement of GBP 234.1bln and gross Gilt issuance of 193.9bln. In terms of this issuance, that will be concentrated on shorter-dated Gilts and feature 13 additional Gilt sales for the remainder of the 2022-23 period.


• As such, pronounced further Gilt pressure occurred sending Gilts to a 99.99 low and the associated 10yr yield to a 3.69% peak and pressuring the SONIA space by over 30 ticks.


• On the latter, and broader BoE pricing/thinking, recall the September 22nd announcement confirmed the BoE is to begin unwinding its holdings of UK debt, but stressed that this can be reviewed if required. With reference to today's announcement, the BoE release noted that the fiscal implications of the mini-Budget would be assessed at the next gathering. Additionally, one of the concern points among officials was the potential demand-push implications of any such reform on the pricing situation. We now look for to guidance in the next few sessions on this from rate setters.


• Finally, the GBP has benefited from the measures designed to stimulate the economy though this upside is limited in nature, amid pronounced USD strength, and is seemingly a beneficiary of the above rate action.

23 Sep 2022 - 10:20- Fixed Income- Source: Newsquawk