Borrowing costs for UK businesses have risen as the fallout from Friday’s mini-budget continues to reverberate around bond markets.
Sterling corporate bond prices look set for their biggest monthly fall since the late 1990s, despite moves by the Bank of England to try to stabilize the market.
The Markit iBoxx Sterling Corporate Bond Index has fallen 10.2 percent so far in September to trade at 296, its lowest level since the start of 2016 and on track for its biggest monthly decline since at least 1999.
Yesterday the bank made an emergency intervention in the financial markets with a plan to start buying long-term government debt. The bank said it would buy bonds to “whatever extent necessary” to ease the turmoil.
Sarang Kulkarni, credit portfolio manager at Vanguard, an investment management group, said the measures had helped ease conditions in the bond market, but added that average yields were still close to 7 percent. That was up from 5.5 percent before Kwasi Kwarteng announced his tax cuts and a plan to finance them with loans, sparking a widespread sell-off in British assets.
Kulkarni said yesterday’s announcement from the bank was “deliberately worded to bring down this volatility. It’s too early to say this is over, there will potentially be more technical pressure across the market as everyone tries to raise liquidity.”
“The Budget announcement has caused unintended consequences for the UK’s growth prospects. Interest rates of 7 per cent are a challenge for some companies, particularly as we head into a slowdown, but at the same time well-capitalised companies are also trading at attractive rates.”
Mike Riddell, a fund manager at Allianz Global Investors, warned before the bank’s announcement that liquidity in the pound market for corporates was “almost non-existent” at the moment. The UK corporate market is smaller than the dollar and euro markets.
The ICE BofA Sterling non-Gilt index, which measures the prices of investment-grade debt, is set for its worst monthly performance since records began in 1997. It has fallen 9.8 percent in September to trade around 337 at Tuesday’s close, the lowest since 2015.
Jim Leaviss, a fund manager at M&G, said credit spreads across markets had widened for several weeks, although there was “clear underperformance” in the UK.