Pound hits 14-month low as UK bond sell-off evokes fears of Truss moment – business live

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Pound falls below $1.23 to 14-month low

The pound has dropped to a 14-month low in early trading in London, as the bond-market sell-off fuels anxiety over UK assets.

Sterling has lost a cent against the US dollar, extending its recent losses, falling to around $1.226.

That’s its lowest level since November 2023, suggesting that the jump in UK borrowing costs this week is continuing to worry the markets, at a time when the dollar is generally strengthening.

Michael Brown, senior research strategist at brokerage Pepperstone, has warned that “things are also getting rather ugly” in the UK.

Brown told clients this morning:

This dynamic, of yields moving higher, as the respective currency falls, is a classic sign of fiscal de-anchoring taking place, and of participants losing confidence in the Government in question’s ability to exert control over the fiscal backdrop.

We’re not at the Truss/Kwarteng stage just yet, but things are clearly on very shaky ground indeed.

Brown added that his preference is to be ‘short GBP’ – ie, betting that the currency will continue to fall.

Despite recent losses, the pound is still comfortably above the record low hit after the 2022 mini-budget, when it plunged to near-parity against the US dollar.

A chart showing the pound against the US dollar over the last five years

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Rachel Reeves heading to China this week to build bridges

The pound’s tumble comes as Rachel Reeves prepares to fly to China in a bid to build closer ties with Beijing.

The chancellor, who is travelling with a delegation of City bigwigs, is holding the visit as part of a concerted effort to build bridges with China, as part of the government’s push for growth.

Our economics editor Heather Stewart explains:

City businesses have urged Reeves to help ensure China is not placed on the higher, more stringent, tier of a new “foreign influence registration scheme” – a decision ultimately to be made by the Home Office.

Lobbyists for overseas governments will have to declare their role under this new regime, but the “enhanced” tier will force companies carrying out any activity on behalf of another state to make themselves known – something business groups fear could prevent closer ties.

The chancellor will take the Bank of England governor, Andrew Bailey, with her on the visit to Beijing and Shanghai, as well as the FCA chief executive, Nikhil Rathi, and a string of senior banking figures, including HSBC’s chair, Mark Tucker.

Reeves will meet China’s vice-premier, He Lifeng, in Beijing before flying to Shanghai for discussions with UK firms operating in China.

Enhanced cooperation on financial services is at the heart of the Treasury’s hopes for the trip. Reeves lavished praise on the sector in her Mansion House speech last year, calling it the “crown jewel” of the UK economy.

Pound falls below $1.23 to 14-month low

The pound has dropped to a 14-month low in early trading in London, as the bond-market sell-off fuels anxiety over UK assets.

Sterling has lost a cent against the US dollar, extending its recent losses, falling to around $1.226.

That’s its lowest level since November 2023, suggesting that the jump in UK borrowing costs this week is continuing to worry the markets, at a time when the dollar is generally strengthening.

Michael Brown, senior research strategist at brokerage Pepperstone, has warned that “things are also getting rather ugly” in the UK.

Brown told clients this morning:

We’re not at the Truss/Kwarteng stage just yet, but things are clearly on very shaky ground indeed.

Brown added that his preference is to be ‘short GBP’ – ie, betting that the currency will continue to fall.

Despite recent losses, the pound is still comfortably above the record low hit after the 2022 mini-budget, when it plunged to near-parity against the US dollar.

Introduction: UK bond sell-off fuels fears of another Truss moment

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

After two days of sharp rises in UK borrowing, City experts are harking back to previous episodes of financial panic – including the dark days after Liz Truss’s mini-budget of 2022.

Britain finds itself in the eye of a global bond market storm at the moment, with the pound also weakening. Yesterday, the yield (rate of return) on 10-year UK government debt hit its highest since the 2008 financial crisis, a day after the 30-year bond yield hit its highest level since 1998.

Last night, Rachel Reeves insisted she had an ‘iron grip’ on the nation’s finances, with a Treasury spokesperson declaring:

“No one should be under any doubt that meeting the fiscal rules is non-negotiable and the Government will have an iron grip on the public finances.

“UK debt is the second lowest in the G7 and only the OBR’s forecast can accurately predict how much headroom the government has - anything else is pure speculation.

“Kick-starting economic growth is the number one mission of this Government as we deliver on our Plan for Change. Over the coming weeks and months, the Chancellor will leave no stone unturned in her determination to deliver economic growth and fight for working people.”

It’s not exactly ‘pure speculation’, though, to point out that rising bond yields eat into the relatively small headroom available to the chancellor to hit her fiscal rules (to not borrow to fund day-to-day spending, and to show debt falling in five year’s time).

If the headroom has vanished by the spring statement in March, it will leave the chancellor with an unpalatable choice – cut government spending, despite demands from the public and cabinet colleagues for better services, or raise taxes further.

The borrowing costs of other governments have also been rising in recent sessions, inculding the US, where there are fears that Donald Trump’s presidency will drive up inflation, making interest rate cuts less likely.

But the situation in the UK feels more acute.

Ipek Ozkardeskaya, senior analyst at Swissquote Bank, says “the UK’s demons are back”, driven by heightened fiscal concerns – which are “evoking memories of Liz Truss’s chaotic ‘mini-budget days.’”

Ozkardeskaya added:

Back then, markets lost confidence in the government’s spending plans, triggering an aggressive selloff that forced the BoE to intervene. The fallout toppled Truss’s government, setting the stage for Labour’s strong electoral win.

But now, the newly elected Labour government, which promised to rescue the country, improve finances, and boost growth, faces its own reckoning. To deliver on its ambitions, it needs market support – a resource proving elusive. Without it, borrowing costs will spiral higher, forcing tougher choices: more taxes, less spending, and weaker growth. And none of that bodes well for the pound.

The sell-off in 2022, after chancellor Kwasi Kwarteng delivered a budget of unfunded tax cuts, was certainly more aggressive than what we’ve seen this week. But long-term borrowing costs are now higher than in the Truss panic.

Kyle Rodda, senior financial market analyst at Capital.com, fears the tumble in UK asset prices could be a sign of another “simmering financial crisis”:

There’s a mini-crisis brewing in UK markets amidst a broad-based sell-off in the country’s assets. For no explicable reason aside from already known factors like weak growth, elevated inflation, and unsustainable fiscal settings, stocks, bonds and the Pound plunged, in moves reminiscent of the 2022 Truss meltdown.

The moves indicate a looming crisis of confidence in the UK and reflects expectations of ongoing and long-term economic malaise which will only be addressed by massive reform.

Dutch bank ING say that several factors are pushing up UK bond yields, including Labour’s spending ambitions, sticky inflation, higher US rates and supply pressures.

But in cheering news for the Treasury, IN’s senior european rates strategist Michiel Tukker is confident that we’re not facing a “sovereign crisis”.

Tukker told clients:

It’s important to note that the demand from foreign buyers remains strong, which reduces the repeat risks of a Liz Truss moment. So whilst rates can stay higher, we don’t expect any steep sell-offs on the back of sovereign risk.

Also, keep in mind that the Truss turmoil was exaggerated by a liquidity crunch among pension funds due to interest rate hedges suddenly moving against them. This time the move up is more gradual, which should prevent such a spiral higher in gilt yields.