Foreign investors dump UK gilts at record rate despite Sunak’s austerity drive

FOREIGN investors sold their UK government bonds at the fastest pace on record in the three months to November, despite Prime Minister Rishi Sunak’s efforts to stabilise the economy after a disastrous September fiscal plan.

Figures from the Bank of England (BOE) showed that overseas investors sold a total of £38.4 billion (S$62 billion) of government debt between September and November, renewing concerns about the weak pound and rising borrowing costs.

Derek Halpenny, head of research at MUFG Bank in Japan, said the three-month average rate of £12.8 billion was the highest since BOE records began in 1982. It was also the first time that foreign investors offloaded gilts for three consecutive months since 2016, when institutions were positioning themselves around the time of the referendum on Brexit.

Foreign investors are among the biggest holders of UK government debt, accounting for almost 30 per cent of the market. Signs that they are shifting out of government bonds, known as gilts, could pose problems for the government in the next financial year. Then, the Treasury will need to raise more than £300 billion – the second-largest remit on record. The largest was during the height of the pandemic.

At the same time, the BOE plans to sell £40 billion of the gilts it bought under earlier quantitative easing measures to stimulate the economy. It was a net purchaser of gilts at the pandemic’s peak.

Halpenny said the apparent loss of foreign institutional confidence “does not bear well, when you look forward to the supply of gilts coming”. If concerns about the outlook mount and markets “go back into a broad risk-off episode, sterling is likely to underperform, or investors will demand a higher yield – or a bit of both”, he said.

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The impact would be a deepening of the cost-of-living crisis, since a weak pound would drive up the cost of imported goods, and higher government bond yields would push up borrowing costs across the economy.

Foreign investors were net sellers of gilts in four of the past five months. This trend started in July, during the Conservative leadership contest that followed Boris Johnson’s resignation as prime minister. It accelerated in September when his successor, Liz Truss, unveiled a “mini-budget” featuring £45 billion of unfunded tax cuts. Most of these have since been reversed under Sunak.

Truss’ fiscal programme triggered a market meltdown that ultimately brought down her government. Sunak, who succeeded her, stabilised public finances with £55 billion of tax rises and spending cuts. But the austerity drive has done little to curb asset sales by international investors. BLOOMBERG