Newton fixed income fund manager Howard Cunningham analyses the impact of the UK government’s financial rescue package on bond markets.
The further emergency fiscal and monetary measures announced by the UK government on 17 March were both massive in scale and coordinated in nature. They were also much needed as the Covid-19 crisis continues to deepen.
Coordinated response
Other nations are responding too, albeit at a different pace and on a different scale. France for instance, has a package estimated at 12% of GDP, accompanied by rhetoric from President Macron around not allowing any businesses to fail. There is also increasing talk of the eurozone issuing joint debt obligations, which would be a game-changer in terms of relieving pressure on Italy in particular. The US Federal Reserve has acted swiftly and aggressively too, but the fiscal response has been slower (not helped by deep divisions between the Republican and Democrat parties).
The £330bn package that the UK Chancellor Rishi Sunak announced on the 17 (on top of the smaller stimulus and reliefs announced at the previous week’s Budget) amounts to 15% of current GDP (approximately £2.2trn). The UK’s public sector net debt is currently £1.8trn and forecast to rise to £2.0 trn by 2024/5 – even before a severe hit to the economy. Assuming all of the measures announced so far eventually end up on the government’s balance sheet, the net debt/GDP ratio will leap to around 100%, even on a normalised basis. In the near term, the ratio will look far worse (China for instance is reporting a 16% year-on-year drop in GDP for Q1, and something of that order is likely in the UK and Europe in the second quarter of the year). However, the head of the Office for Budget Responsibility, Robert Chote, has agreed that this “whatever it takes” approach is the correct one, given the war-like predicament the country is facing.
Short-term relief
In terms of the detail, the Covid Corporate Financing Facility (CCFF) should alleviate some short-term funding stress related to the commercial paper market; it has a broader reach than similar programmes announced in the US, in that companies that don’t currently issue commercial paper will also be able to use the facility, rather than just the highest quality borrowers, as is the case in the US.
The expected surge in government borrowing is having an impact on price: 10-year gilt yields at 0.8% are about 0.5% higher than the lows of early March, but still only around levels seen in the second half of 2019. This makes them still relatively low and affordable, so the cost of interest is not currently a major concern. Furthermore, additional quantitative easing looks very likely, and this should help keep bond yields in check.
For Professional Clients, only. This is a financial promotion and is not investment advice.
Any views and opinions are those of the investment manager, unless otherwise noted.
This is not investment research or a research recommendation for regulatory purposes.
BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and its subsidiaries.
Issued in the UK by BNY Mellon Investment Management EMEA Limited, BNY Mellon Centre, 160 Queen Victoria Street, London EC4V 4LA. Registered in England No. 1118580. Authorised and regulated by the Financial Conduct Authority. MAR000776
