Bond costs up as fallout from mini-budget reverberates around UK

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Bond costs up as fallout from mini-budget reverberates around UK

Borrowing costs for British companies have gone up as the fallout from Friday's mini-budget continues to reverberate around bond markets.

The pound is poised to fall its biggest monthly fall since the late 1990s despite Bank of England moves to try to regulate the market.

The Markit iBoxx Sterling Corporate Bond Index has fallen by 10.2 per cent since September to 296, its lowest level since the start of 2016 and on course for the biggest monthly slide since 1999.

Yesterday, the Bank made an emergency intervention in financial markets with a plan to buy long-term government debt. The Bank said it would buy bonds on whatever scale necessary to calm the turmoil.

Sarang Kulkarni, credit portfolio manager at Vanguard, said the measures had helped to ease conditions in the bond market, but added that average yields were still close to 7 per cent. The tax cuts and plan to fund them with borrowing were triggered by a sell-off of UK assets before Kwasi Kwarteng announced his plan to fund them with borrowing.

Kulkarni said yesterday that the Bank was intent on bringing down that volatility. It is too early to say that this is over, there will be more technical pressure on the market as everyone tries to raise liquidity.

Yields are at 7 per cent a challenge for some companies, especially since we are going into a slow down, but well-capitalised companies are trading at attractive yields at the same time. Mike Riddell, a fund manager at Allianz Global Investors, warned that the Bank's announcement that liquidity in the corporate sterling market was almost non-existent at the moment. The UK's corporate market is smaller than the dollar and euro markets.

The ICE BofA non-Gilt Index, which measures the prices of investment grade debt, is set to have its worst month since 1997, according to the ICE BofA Sterling Non-Gilt Index. It is down 9.8 per cent in September with a price of 337 at Tuesday s close, the lowest since 2015.

Jim Leaviss, a fund manager at M&G, said credit spreads across markets had been widening for several weeks, although there was definite underperformance in the UK.