The yield on 10-year gilts spiked Wednesday to 3.97pc, 46 basis points higher than costs on French bonds. Britain and France were neck and neck as recently as last month, before Labour’s pre-Budget report raised deep concerns among Chinese, Arab, and Russian investors about the credibility of British state.
But what has caught market attention is the narrowing gap with Italian bonds, once mocked as the symbol of an ill-governed nation in thrall to the Dolce Vita
Yields on 10-Italian treasuries have been hovering just above 4pc despite the eurozone’s Greek crisis, dropping as low as 3.98pc earlier this week.
Julian Callow, Europe economist at Barclays Capital, said Britain is nearing the eye of the storm as the Bank of England starts to unwind quantitative easing.
“The Bank has bought more gilts over the last nine months than the Government has issued. It has magically eradicated the cost of financing the deficits, but this is going twist dramatically the other way in early 2010. Markets know this. They are demanding a risk premium on sterling.”
“On top of this you have all the uncertainty over the election. We have the highest deficit in the EU as a share of GDP after Latvia and Ireland. It is not clear whether the next government will have the nerve to push through the tremendous fiscal tightening we need,” he said.
Britain is vulnerable to a “gilts strike” because foreign investors own £217bn of UK debt, or 28pc of the total. These are footloose funds and likely to sell large holdings if Britain loses its AAA rating.
They have other tempting places to park their money, such as Turkey, Brazil, or India, where demography is healthy and growth prospects are better. Chile has already undercut British debt yields on some maturities.
Simon Derrick, currency chief at the Bank of New York Mellon, said global markets do not believe the UK Treasury forecast for 3.5pc growth in 2011.
“The Government will have borrowed £1.5 trillion in the five years up to 2014 . The market response is entirely rational,” he said.
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But what has caught market attention is the narrowing gap with Italian bonds, once mocked as the symbol of an ill-governed nation in thrall to the Dolce Vita
Yields on 10-Italian treasuries have been hovering just above 4pc despite the eurozone’s Greek crisis, dropping as low as 3.98pc earlier this week.
Julian Callow, Europe economist at Barclays Capital, said Britain is nearing the eye of the storm as the Bank of England starts to unwind quantitative easing.
“The Bank has bought more gilts over the last nine months than the Government has issued. It has magically eradicated the cost of financing the deficits, but this is going twist dramatically the other way in early 2010. Markets know this. They are demanding a risk premium on sterling.”
“On top of this you have all the uncertainty over the election. We have the highest deficit in the EU as a share of GDP after Latvia and Ireland. It is not clear whether the next government will have the nerve to push through the tremendous fiscal tightening we need,” he said.
Britain is vulnerable to a “gilts strike” because foreign investors own £217bn of UK debt, or 28pc of the total. These are footloose funds and likely to sell large holdings if Britain loses its AAA rating.
They have other tempting places to park their money, such as Turkey, Brazil, or India, where demography is healthy and growth prospects are better. Chile has already undercut British debt yields on some maturities.
Simon Derrick, currency chief at the Bank of New York Mellon, said global markets do not believe the UK Treasury forecast for 3.5pc growth in 2011.
“The Government will have borrowed £1.5 trillion in the five years up to 2014 . The market response is entirely rational,” he said.
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