“Yields are currently up c.10bps today, and although yields across Europe are also modestly higher there is definitely a UK specific impact going on. The 10 year yield is just off the 12 month high.“I think there has been more reaction as the impact from yesterday is digested. For example, the IFS now believe Reeves’ £25bn national insurance revenue boost will in practice be far less (c.£16bn) because of the impact of lower wage growth – which means more gilt issuance. The OBR put a ‘guesstimate’ on the structural impact on gilt yields from increased issuance, which they estimated would be 0.25% higher. The forecasts for the Bank of England base rate cuts have reduced due to the inflationary impact of yesterday’s package.
“Remember, the Bank of England is currently selling gilts at a rate of £100bn each year as part of QT. It feels like a situation that could get worse, but currently the budget doesn’t appear to have increased yields on a very dramatic scale yet, which of course, would be more concerning. Schemes should continue to monitor hedging levels, ensure they have clear collateral support in place (we may see cash calls resulting from higher yields), rebalance asset allocation where appropriate, and consider opportunities to de-risk where funding levels have benefited from the increase in yields.
“For now, it seems like pension tax rules and tax-free cash has been spared, but that’s not to say the Chancellor won’t look again at these areas – she doesn’t have many levers to pull, and the IFS is doubtful the tax raising will stop here.”
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