The repricing of the UK yield curve

Views From the Marsh - David Owen

What should we make of the significant repricing of the UK curve of recent days?

● First, we have long argued that the market was too optimistic about the likely pace of Bank Rate cuts, and where longer term UK yields would eventually settle.

● Second, much of the sell-off has been led by developments in the US. But, then this begs the question, what happens if US data releases continue to surprise on the upside, and US yields continue to head higher?

● Last week saw us publish a major piece reviewing our work on climate change in 2024. We now cover 120 sovereigns globally. The UK scores relatively highly on many of the metrics that we look at.

● Given the size of the UK current account deficit (and basic balance, making its financing very reliant on short-term capital flows), and the ongoing drag on GDP from net trade (particularly related to the weak exports of goods), a weaker sterling may be no bad thing.

● But, there is no doubting how boxed-in the Chancellor is, with higher yields now adding to the government’s debt service bill. And important to note that increased defence spending and the government’s stated aims of building a lot more houses could add further to UK inflationary pressures.

● One of the biggest risks for 2025 and 2026 is the need for the UK’s corporate sector, running a deficit of almost 3% of GDP, to roll over its debts, on top of the increased employment costs that have been announced. How skewed is this to certain sectors and Private Equity?

● This all comes against the backdrop of relatively rapid structural change and innovation, led by AI and the move to net zero, and the need to adapt to climate change.

● Finally, as a last resort, the BoE has shown before (in the midst of the dash for cash of the LDI crisis) that it can be very effective in stepping in to support the market for a limited period (then, it only bought £19.3bn of government debt, which it quickly unwound at a profit).

We now turn to a key data release from the BoE, and speech and Q&A by Deputy Governor Sarah Breeden (which was not recorded).

The December DMP survey was conducted between 6 and 20 December and received 2,346 responses from company CFOs - who may have a very different view of their company’s prospects than the purchasing managers surveyed by the PMIs.

We also know that the BoE place great weight on the results.

Please consider becoming a paying subscriber to continue reading on.