Yields for interest-rate sensitive two-year gilts - as well as for 10-year bonds which factor in longer-term concerns about inflation and debt issuance - have jumped by more this month than any month since May 1994 when there was a slump in prices known as the 'Great Bond Massacre'.
A higher-than-expected July inflation reading of 10.1% - the first time consumer price inflation has hit double digits in 40 years - dealt a further blow on Aug. 17. Neither Truss nor Sunak have specified what support they think is needed. Media reports on Sunday said Truss - the front-runner in polls of Conservative Party members - was considering cutting the rate of value-added tax to 5% from 20%, at a cost of around 38 billion pounds a year.
Unlike during the COVID-19 pandemic, when hundreds of billions of pounds of new debt was lapped up by markets without leading to higher borrowing costs, current high inflation meant bonds were no longer viewed as a safe haven, he added.British government bond yields are also being pushed higher by what markets see as a more hawkish BoE stance at August's meeting. The BoE said it was still prepared to raise rates forcefully if needed, despite forecasting a lengthy recession.
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