UK bonds and pound hit as Bank of England denies it will delay bond sales – business live | Business

Bank of England: Risk of another fire-sale in gilts significantly reduced – Reuters

On Wall Street, Goldman Sachs is reorganising parts of its business after a drop in earnings.

As had been rumoured, Goldman is to fold its trading and investment banking business into one unit.

This will shrink the bank from four to three divisions; asset and wealth management, global banking and markets and platform solutions.

Goldman also reported earnings per share of $8.25 for the third quarter of 2022, better than forecasts, but down on the $14.93/share a year ago when markets and dealmaking was more buoyant.

Goldman says it “continued to support clients amid a challenging macroeconomic environment”

UK mortgage costs are continuing to climb, even after Chancellor Jeremy Hunt scrapped most of the mini-budget in an attempt to reverse the loss of credibility that drove up borrowing costs.

Bloomberg explains why:

The average two-year fixed-rate home loan jumped to 6.53% on Tuesday, rising further above the 14-year high reached last week, according to Moneyfacts Group Plc. The average five-year fixed-rate deal climbed to 6.36% after breaching 6% for the first time since 2008 a fortnight ago.

On Monday, Hunt reversed almost all of the tax cuts and giveaways that were announced by his predecessor Kwasi Kwarteng in September. The move prompted a surge in UK government bonds, but it will take several days for banks to factor the corresponding fall in yields into the mortgage prices they offer.

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Two-year UK government bonds have also dropped after the Bank of England denied deciding to pause debt sales.

The yield on two-year gilts has now risen to 3.65%, up 6 basis points.

That’s a modest move by recent standards, but not the direction the Treasury wants to see, as it reverses some of Monday’s rally.

As Bloomberg explains:

With the BOE saying a Financial Times report it would push back sales was inaccurate, traders are worrying about a deluge of sovereign issuance from both the central bank and government.

Over in Germany, investor sentiment remains very weak as Europe’s largest economy falls closer to recession in the energy crisis.

The ZEW economic research institute’s economic sentiment index grew slightly in October, to -59.2, from -61.9 in September, slightly better than expected, but still very low.

ZEW’s index of current conditions deterioratated further down by 11.7 points in October to a reading of -72.2.

ZEW President Achim Wambach, said the economic outlook has deteriorated again, warning:

“The probability that real gross domestic product will decline in the course of the next six months has also increased considerably.”

Here’s how the pound reacted:

The Bank of England don’t actually specify what’s ‘inaccurate’ in the FT’s report that they’re set to delay the sale of billions of pounds of government bonds.

The sale was due to start at the end of the month, having been delayed from early October.

So there’s still almost a fortnight before Bank governor Andrew Bailey actually presses the QT button to start gilt sales. So he could still delay, even if that decision hasn’t been taken yet.

And the FT story says that the Bank is “now expected to bow to investor pressure for a further pause until the market becomes calmer”, not that it has bowed.

Reuters’ Andy Bruce dubs this morning’s statement a ‘non-denial denial’, as the BoE isn’t categorically saying that the sales won’t be delayed again.

The pound has taken a knock too – down half a cent at $1.1305.

Bank of England: Report of decision to delay bond sales is inaccurate

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The UK’s armed forces minister, James Heappey, has shown the challenge Jeremy Hunt will face in cutting spending, by suggesting he would quit if the defence budget wasn’t increased as promised.

Speaking on Tuesday, Heappey said the government still intended to spend 3% of GDP on defence by 2030, as pledged by Liz Truss before she became leader

Asked if he would quit if that changed, he told LBC:

“Yes. But no one has said that 3% is not going to happen by 2030 … we need to be spending 3% of our GDP on defence of our nation by 2030 because there is no prosperity without security.”

Heappey also told Sky News:

“The commitment the prime minister made is 3% by 2030 and to be clear like the secretary of state [for defence, Ben Wallace] that’s something that I believe must be delivered given the need to keep our nation safe given increasingly uncertain times.”

Here’s the full story, by my colleague Jessica Elgot:

Pantheon Economics have warned that chancellor Jeremy Hunt needs to find at least £39bn of additional savings, to get debt falling as a share of the economy in the medium term.

It says:

• The new Chancellor’s quick actions have reduced the outlook for public borrowing in 2025/26 by £35B…

• …But he needs to find at least £39B more savings to ensure the debt-to-GDP ratio is falling in three years’ time.

Pantheon also estimate that CPI inflation increased to 10.1% in September, from 9.9% in August. The data is due tomorrow morning.

The demands on the NHS, the increase in pensioners, rising debt costs and the Ukraine war all means that the government can’t cut the size of the state easily, or possibly at all.

Former Conservative leader William Hague makes this case in The Times today, explaining how the Trussomic notion that tax cuts would spark a resurgence of growth was dead and buried:

Enthusiasts for Truss’s original idea will argue that the crashing of it was down to poor driving skills — adding in an unpopular reduction in the top rate of tax and neglecting to accompany the measures with official forecasts ruined everything else. While that is partly true, the decisive problem was that Truss and Kwarteng were driving at a brick wall: the immense difficulty of reducing the size of the state in the present day. This is not the 1980s, when Tories could benefit from unloading nationalised industries and mass council housing, while being cushioned by North Sea oil and eventually a peace dividend as the Cold War ended.

In the 2020s, we have a health service with seven million people on its post-lockdown waiting lists, a larger than ever pensioner population who demand triple-lock increases, debt interest soaring and defence spending necessarily rising as a war on our own continent intensifies. Even if every sinew is strained to reduce other expenditure, those four items alone mean there will be no smaller state in the foreseeable future.

Having tested to destruction the idea that a low-tax revolution can allow a breakout from that reality, Conservatives will now need to turn to new ideas for the future. That may be no bad thing.

But Hague adds that it will be just as hard for Labour to grow the state, without large tax increases for the general population. The task is harder as the Conservatives keep lifting more of their fiscal policies (they’ve already filched the shorter energy bill freeze, and one energy windfall tax earlier this year).

More here: William Hague: Ideology is dead: it’s competence we need now