Bond yields fall, pound recovers after Liz Truss quits

by

Markets were showing signs of relief this afternoon after the PM resigned: sterling strengthened against the dollar, interest rates are falling.

Crashed markets, skeptical investors, soaring borrowing costs: Liz Truss’s stint at Downing Street may have been short, but it has left deep scars on the British economy, many observers say.

Markets were showing signs of relief this afternoon after the PM resigned: sterling strengthened against the dollar, interest rates are falling.

“Liz Truss’s big political gamble backfired, but in the process caused significant damage to the economy,” commented Hargreaves Lansdown analyst Suzanne Streeter.

“The politics of recent weeks have undermined the confidence of people, businesses, markets and international investors in Britain,” said Tony Dunker, the director general of the CBI, the country’s biggest employers’ federation.

Around 18.00 (Greece time) the yield of the 10-year bond was at 3.82% and the 30-year at 3.86%. Bond yields, however, remain well above where they were at the end of 2021, suggesting that the hedge sought by investors to finance UK debt has not disappeared.

At the same time, the exchange rate of the pound against the dollar was at 1.1323 dollars.

Two weeks after she took office, Truss and her even more short-lived Finance Minister Kwazi Kwarteng sent markets into a frenzy when they unveiled the misnamed “mini budget” that included drastic tax cuts while covering high energy costs, without explain where the required resources will be found. As it would have to be financed by buying debt from the markets, and because it was at odds with the Bank of England’s efforts to bring down inflation, which is reaching 10%, it caused a sharp loss of investor confidence and an ebullition in the markets. The 30-year bond yield soared to over 5% (a 20-year high) and the Bank of England was forced to intervene. The pound fell to an all-time low. The International Monetary Fund also got involved, calling on the British government to make corrections and “come into line” with the monetary authorities.

All of this had direct effects on the real economy: mortgage and business loan rates soared, at a time when the economy was already teetering on the brink of recession.

Amid the cost-of-living crisis, with millions of Britons already cutting back on what they eat or heat their homes, the economic agenda of Trass, a politician who started her career at oil company Shell, favored the wealthy, as they would benefit most from the tax cuts he planned. Truss finally caved to the pressure and expelled Kwarteng from her government. He replaced him with Jeremy Hunt, who canceled almost all of the “mini budget”. He also hints that “very tough decisions” will have to be made, possibly spending cuts and a return to austerity.

Unable to reverse the chaos, Liz Truss threw in the towel: she announced her resignation.

Greenpeace called on London to redefine its priorities: “this sad saga shows us that a prime minister who wants to make the rich richer, to put fossil fuel profits before people’s well-being, to support the hydraulic fracturing, to abolish environmental protection, will not last (…) The next government must learn from this”.

RES-EMP

You May Also Like

Recommended for you