Bond yields rise as Kwarteng announces tax cuts and quantifies energy price freeze

Bond yields soared on Friday as the UK government cut a range of taxes and for the first time quantified the cost of capping energy bills, saying they will cost £60 billion over the next six months.

Chancellor Kwasi Kwarteng’s so-called mini-budget speech outlined a plan to eliminate corporate tax hikes, lower the top rate of personal taxes and remove the cap on bankers’ bonuses.

Britain’s Treasury said the cost of the package would be funded by additional £62 billion in sales of government bonds.

The return on the 2-year Gilt TMBMKGB-02Y,
shot up 37 basis points to 3.87%. The yield of the 10-year Gilt TMBMKGB-10Y,
rose 33 basis points to 3.83%, continuing its meteoric rise from 2.6% less than a month ago.

the pound GBPUSD,
moved from its low for the day of $1.1151, although it is still close to its lowest since 1985.

Paul Johnson, director of the Institute for Fiscal Studies, said the tax cuts were the biggest since 1972. “This budget is now considered the worst in modern times. I really hope this one works a lot better,” he said in a tweet.

“The good news is that the income tax cuts will boost revenues for retailers and consumer businesses, and the stamp duty cut should prompt a repricing of homebuilders as investors price in a more resilient housing market,” said strategists at Liberum Capital, led by Joachim Klemens .

“The bad news is that the tax cuts will significantly increase the government deficit due to a lack of spending cuts to fund them. This will put additional pressure on sterling and increase import price inflation. The Bank of England could respond with another outsized rate hike in November and markets will price in a higher risk premium for long-dated gilts, which is bad for growth stocks in the near term as long as this repricing occurs.”

here are the most important provisions.

  • Lowers personal property tax rate from 20% to 19% and eliminates top rate of 45% for those earning over £150,000

  • Cancels the 1.25 percentage point Social Security increase from November 6th

  • Eliminates a planned 25% increase in the corporate tax rate and leaves the rate at 19%

  • First-time buyers only pay stamp duty on houses over £425,000, versus £300,000

  • Freezes taxes on alcohol from February, which is estimated to be worth £600m a year

UK builders including Persimmon PSN,
advanced after the stamp tax messages. The wider FTSE 100 UKX,
however, fell by over 1%. Bond yields rise as Kwarteng announces tax cuts and quantifies energy price freeze

Brian Lowry

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