Foreign Investors Sell UK Gilts at Highest Rate Ever Despite Austerity Measures

In the three months leading up to November, foreign investors sold off UK government bonds at a rate faster than ever before, despite Prime Minister Rishi Sunak's attempts to stabilize the economy following a difficult September fiscal plan.

Data from the Bank of England has revealed that foreign investors sold off £38.4 billion of British government debt between September and November, raising worries about the declining value of the pound and the increasing cost of borrowing.

According to Derek Halpenny, the head of research at MUFG bank in Japan, the three-month average rate of £12.8 billion is the highest since the Bank of England began keeping records in 1982. This is also the first time since 2016 that foreign investors have sold gilts for three consecutive months, likely due to the referendum on exiting the European Union.

Non-domestic investors make up a significant portion of the UK government debt market, representing nearly 30%. If these investors start to move away from government bonds, known as gilts, it could create difficulties for the Treasury in the upcoming fiscal year. The Treasury is expected to raise more than £300 billion, which is the second highest amount in history.

The Bank of England (BOE) is planning to sell £40 billion worth of gilts, which it had purchased as part of its quantitative easing program to stimulate the economy. This is a change from the peak of the pandemic, when the government's financing needs were greater and the BOE was a net buyer of gilts.

According to Halpenny, the lack of foreign institutional confidence is not a good sign for the future supply of gilts. If worries about the future increase and markets become more risk-averse, it is likely that sterling will suffer or investors will require a higher yield, or possibly both.

The consequences of a weak pound would be far-reaching, as the cost of imported goods would increase and borrowing costs would rise throughout the economy. This would only exacerbate the already existing cost-of-living crisis.

Foreign investors have been unloading gilts for the majority of the past five months, beginning in July when Boris Johnson stepped down as Prime Minister and a Conservative leadership contest ensued. This trend intensified in September when Liz Truss announced £45 billion of tax cuts that were not backed by funds, most of which have since been reversed by Rishi Sunak.

Truss's financial plan caused a market crash that eventually caused her government to collapse. Sunak, who took her place, was able to stabilize the public finances with £55 billion of tax increases and spending reductions. Nevertheless, foreign investors have kept selling assets even with Sunak's austerity program in place.