The pound sterling has experienced a further sell-off this morning, with º£½ÇÊÓƵ government bond yields ticking upwards as º£½ÇÊÓƵ risk assets face ongoing strain.
The currency dipped below $1.23 against the dollar in early trading and is currently down by 0.7% versus the dollar and 0.6% against the euro, as reported by .
Concurrently, the FTSE 250 index, which tends to reflect domestic market sentiment, opened with a decline of 0.6%. Following a day when 30-year government bond yields hit their highest point this century, the yield on 10-year government bonds surged to 4.82%, a peak not seen since August 2008.
"We’re not at the Truss/Kwarteng stage just yet, but things are clearly on very shaky ground indeed," commented Michael Brown, senior research strategist at Pepperstone. The pound also weakened across the board yesterday, dropping over one per cent against the dollar to a more than one-year low of $1.238.
Derivative markets suggest the pound's weakness may persist, with one-week sterling to dollar risk reversals reaching their most negative stance since early November, indicating that puts are trading at a significant premium over calls for the first time since the US election day.
"In part, this move is shadowing a rise in US bond yields, driven by signs of a still strong US economy alongside indications of persistent inflation that are prompting investors to review expectations for two rate cuts in the year ahead," said Lindsay James, investment strategist at Quilter Investors.
"Term premium, the additional yield investors demand for lending long-term money, has also been on the rise, with one factor being the pure level of uncertainty around the future path of inflation and the productive potential of the economy."
With the º£½ÇÊÓƵ enduring stickier inflation than most other developed economies, the Bank of England has been towing a more hawkish line than most of its peers. However, a key factor continues to be the size of the bond sales by both the º£½ÇÊÓƵ government and the Bank of England.
The government’s bond issuance is expected to reach almost £300bn this year, driving up yields even as the economy begins to show cracks. Stagnant growth and the continuing gilt sell-off has "all but wiped out Chancellor Reeves’ fiscal headroom, which was already incredibly slim at around £10bn," noted Brown.
