Mark Bathgate

The markets’ verdict on the PBR

The markets' verdict on the PBR
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The press didn’t like Darling’s budget – and neither do the markets. What Darling didn’t say yesterday is that the Treasury is looking to borrow £243 billion from the City by the end of the financial year – this info was slipped out by the debt management office (link here). Brother, can you spare a quarter of a trillion quid? The markets are not sure they can. Gilts are being hammered today - biggest single day sell off for some time - 13bps so far this morning on 10yr gilts. They now stand at 63bps above German bunds, the widest since the crisis started.

On another measure, Credit Default Swaps, the UK is being hit hard again. It now costs $85,000 to insure $10 million of UK debt against default – against just $24,000 for German debt. This multiple is at a record high. There is no other economic news about: this is all reaction to the Pre-Budget Report. The trebling of the Germanu/UK cds ratio shows just how much the government has relied on the Bank of England money printing programme to get through this year. Without that, the gilt market would have blown up long ago.

The pound is holding together for the moment, but further gilt weakness or an increase in Bank of England monetisation at its meeting today would see it hit hard.