Whirlwind Week for Bonds and the Government​

By Jake Rickman​

What do you need to know this week?

Another week. Another Chancellor of the Exchequer.

Last Friday, 14 October, former Foreign Secretary Jeremy Hunt replaced Kwasi Kwarteng as the head of the Treasury following what was one of the most chaotic couple of weeks in living memory for both the UK government and the bond market. This is now the fourth Chancellor in four months.

Following the new Chancellor’s press conference this past Monday, the public learned that the government has abandoned nearly all substantial aspects of the Truss-Kwarteng disastrous “mini-budget”. Importantly, the corporation tax is now due to rise to 25% come April (as was the plan before) and the 1% cut to the basic income tax rate has been axed as well. Hunt has also indicated the initially proposed energy relief scheme may not be as extensive as Truss promised…

As far as Truss is concerned, her agenda — the very one she campaigned upon less than a month ago — has effectively been overturned by her own party’s MPs in what is one of the most acute leadership failings in recent British history. There is doubt as to whether she will remain Prime Minister. Indeed, it is certainly within the realm of possibility that Truss may have resigned in the short span of time between when this article was written and published. (Edit on publication - not yet!)

Why is this important for your interviews?

This spectacle reveals several salient points, all of which are potentially relevant in the context of an interview seeking to gauge your commercial awareness.

First, the Bank of England is prepared to stage a limited intervention to stabilise the markets, as it did following the government’s disastrous “mini-budget” announcement. But the operative word here is limited. Despite gilt yields having approached similar levels on Friday as they did three weeks ago — and despite rumours that it would act otherwise — the Bank held fast to its vow that it would not extend the gilt repurchase programme that expired last Friday, 14 October. (That said, it did agree to delay the date which it offloads the gilts back to the market.)

Why? Because fighting inflation remains the BoE’s central objective, as is the objective of the United States Federal Reserve and, more recently, the European Central Bank. The Truss-Kwarteng kerfuffle put the BoE in direct confrontation with the government for reasons discussed last week and the week before — a confrontation the BoE seems to have won (at least for now).

Second, investors are existentially uneasy about the UK government’s debt borrowing given the current macroeconomic uncertainties. Though Truss and Kwarteng may argue otherwise, investors, the IMF, and Joe Biden (among others) concluded the government’s plan flew in the face of economic sensibility. The fact that both the gilt market and the pound sterling have somewhat stabilised following the U-turn is a testament to this.

Third, economic austerity may be back. Hunt has hinted that he may look to cut public spending further, though following more than a decade of similar policies, many wonder aloud what else there is to cut.

Taken in aggregate, the sequence of events spanning the past several weeks has arguably done more to upset the economic order than anything in the past decade. Britain may be entering a new economic chapter that might be decidedly less cheery than our current situation.