UK tax turnaround lifts euro-bonds as Chancellor announces £32bn tax hike plans

Euro-zone government bond yields fell sharply on Monday, tracking UK gilts, after the new UK finance minister scrapped almost all of September’s disastrous ‘mini-budget’.

However, euro-zone yields were still not far from their highest levels in more than 10 years, with investors also focused on inflationary risks and an increasing supply of bonds.

UK Treasury Secretary Jeremy Hunt on Monday announced tax changes that he said would bring £32 billion in additional revenue.

The 10-year German government bond yield fell 10 basis points (bps) to 2.258 percent, facing its biggest daily decline since Oct. 3. Last week it reached 2.423 percent, the highest since August 2011.

UK 10-year gilt yields fell 37 basis points to 3.958 percent, while two-year gilt yields fell 29 basis points to 3.591 percent. Yields fall when bond prices rise.

The UK government’s newfound willingness to support fiscal sustainability “triggered a rally in gilts (which is affecting the eurozone),” said Antoine Bouvet, senior rates strategist at ING.

“But the market is still nervous, it has no clear direction given central bank tightening, inflation and a more hawkish Fed,” he said, referring to the US Federal Reserve.

Michael Brown, head of market research at Caxton, said Mr Hunt had “almost everything that was left” of his predecessor Kwasi Kwarteng’s financial plans.

“The measures plug around £32bn of the £40bn gap in public finances following Friday’s corporate tax hike and have helped calm markets.”

Still, eurozone bond yields remained significantly higher than just two months ago, when 10-year German government bond yields were below 1 percent.

Analysts expect euro-zone governments to take on more debt to fund public spending and mitigate the impact of rising energy prices. Meanwhile, the European Central Bank is weighing when to start winding down its bond portfolio.

Two key ECB policymakers on Saturday called for the bank’s massive balance sheet to be trimmed as the ECB currently holds over €5 trillion in bonds.

On Friday, strong US inflation data reinforced views that the Fed is likely to continue hiking rates aggressively, increasing pressure on the ECB.

Europe’s energy subsidies could lower the current rate of inflation, but only at the cost of higher levels in the future, potentially making the task of monetary policy more difficult, ECB policymaker Francois Villeroy de Galhau said on Saturday. UK tax turnaround lifts euro-bonds as Chancellor announces £32bn tax hike plans

Fry Electronics Team

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