Former British Prime Minister Liz Truss posted a chart on Monday and drew a circle around the long end.
“Gilts almost at 6%. Bank of England never managed to achieve that in my era…”
She thinks she is teaching current PM Andy Burnham a lesson about decline. She is. It is just not the lesson on the card.
The number is real. On Monday the 30-year gilt yield traded as high as 5.95 percent, the most since 1998, with the 10-year close to a 19-year high. By Tuesday the 30-year was still 5.91 percent. Brent was above $107. The Bank of England meets on Thursday with Bank Rate at 3.75 percent. Chancellor John Healey’s first Budget is on 28 October.
Those figures are not in dispute. What they mean for October is.
The 6 percent is not a Bank of England print
The first thing Truss is teaching, accidentally, is not to confuse the institution with the price.
The Bank of England sets Bank Rate. It does not set the 30-year gilt yield. Bank Rate is 3.75 percent. The July MPC held it there by six votes to three. Thursday is widely expected to do the same. Markets have been pricing a later hike, not one this week.
The 30-year is a different challenge. It is duration, inflation risk, oil, and the stock of debt the Debt Management Office still has to sell. Calling that a Bank of England achievement is like blaming the umpire for the scoreboard.
Truss knows the distinction. In September 2022 her government learned it in public.
What Truss’s era actually did to the curve
Her era lasted 49 days. That is the second lesson, and it is not subtle.
On 23 September 2022 Chancellor Kwasi Kwarteng announced about £45 billion of unfunded tax cuts without an Office for Budget Responsibility forecast. The 30-year gilt yield went from about 3.5 percent before the statement to more than 5 percent by 27 September. On 12 October it touched 5.10 percent. Sterling hit a record low against the dollar. Liability-driven pension schemes had to sell the bonds they were meant to hold. On 28 September the Bank of England stopped quantitative tightening and started buying long gilts after the 30-year moved 1.27 percentage points in a single session.
That was a UK-specific incident. It was the speed that did the damage, not the terminal yield. A 150 basis-point lurch in a few sessions is a crisis. A grind from 4 percent to 6 percent over years is a cost.
Today’s 30-year is higher than the Truss peak. That sentence is true. The market will live with a high yield that arrived with oil. It will not live with a high yield that arrives with another unfunded domestic shock.
This sell-off is not a UK accident
The Iran war started in February. Oil is back above $100 and, on Monday, above $107 after Houthi forces tightened their grip near the Bab al-Mandeb. Gilt yields have been rising alongside US Treasuries, not against them. Twenty- and 30-year paper across the G7 has been marking multi-year or multi-decade highs for the same three reasons: energy, supply, and a term premium that no longer pretends deficits are free.
In July, Rathbones’ Bryn Jones put 90 to 95 percent of the then gilt move on the war, not on the new prime minister. That split will have shifted a bit since Andy Burnham took office and John Healey replaced Rachel Reeves.
Aberdeen’s Felix Feather made the same point after Tuesday’s labour numbers. Unemployment held at 4.9 percent. Payrolls fell. The gilt still cheapened because oil and the global curve were louder than the jobs data.
In 2022 the rest of the world watched London burn. In 2026 London is in the same room as everyone else, sitting closer to the radiator.
Healey’s problem is the level, not the tweet
A hedge fund does not need Truss to tell it that 6 percent on the long gilt is expensive for a government that still runs a wide deficit.
Higher yields eat fiscal headroom before a chancellor opens his red box. In early September, Deutsche Bank’s Sanjay Raja put Healey’s buffer against the current-budget rule at about £13.8 billion if the sell-off stuck, down from the spring forecast. Debt interest is already one of the large lines in the budget. Every extra tenth on the 10-year and the 30-year makes Healey’s “fiscal discipline” letter to cabinet a tighter garment.
Burnham arrived with cost-of-living promises: VAT off domestic electricity, cheaper pub rates, a £2 bus cap. He also inherited a defence plan with a hole in it. Healey, who left the Ministry of Defence arguing that the money was not there, is now the man who has to find it without breaking the fiscal rules he said he would keep.
The gilt market will not referee Liz Truss’s post. It will referee the Budget.
If 28 October looks funded, the 5.9 percent 30-year can stay an energy story. If it looks like another uncosted wish list, the comparison Truss wants will arrive whether anyone invites it or not. The difference is mechanism. In 2022 the shock was domestic policy. This time the shock is imported.
What Thursday actually decides
The MPC is not going to “achieve” 6 percent on Thursday. The base case is a hold at 3.75 percent and a slower gilt rundown, from £70 billion a year toward £50 billion.
There is a second decision sitting behind that one. The Telegraph reported this morning, citing sources, that the Bank may stop selling 20- and 30-year gilts when it resets quantitative tightening. Reuters has not confirmed it. If the report is right, Threadneedle Street would be stepping back from the part of the curve that has already gone to a 28-year high. That would not cap the 30-year on its own. It would mean the Bank has decided not to add supply where the market is already tight.
A hold with slower sales is not stimulus. It is the Bank trying not to be a forced seller into a curve that oil has already cheapened. Markets on Monday were only about 30 percent priced for a move this week and much closer to one by November.
None of that is a verdict on 49 days in 2022.
Truss is pointing at a yield the Bank did not choose and calling it a score against the institution that had to clean up her last experiment. The 30-year is almost at 6 percent because crude is over $100, governments are issuing, and investors want more term premium to hold long paper. Britain is not exempt. It is also not uniquely cursed.
What she is teaching Burnham is simpler than her post. A gilt market will live with a war premium. It will not live with a government that treats the cost of that premium as optional. The interesting date is not Monday’s chart. It is 28 October. That is when the 6 percent gilt decides whether it was a lesson or a sequel.
Author: Andy Samu
The editorial team at #DisruptionBanking has taken all precautions to ensure that no persons or organisations have been adversely affected or offered any sort of financial advice in this article.
See Also:
How can the UK government regain the trust of markets? | Disruption Banking
