The Daily Update: Gilt Market Rally / BoC Surprise

The UK Gilt market yesterday staged its biggest one-day rally since March last year after stronger than expected economic recovery boosted tax receipts. The Office for Budget Responsibility (OBR) revised up its forecasts for UK growth and now expects the UK economy to return to its pre-pandemic level at the turn of the year. The OBR estimates the U.K. economy to grow by 6.5% in 2021 (the fastest growth rate since 1973), up from its previous forecast of 4%, and projects growth of 6% in 2022. The OBR also revised its unemployment forecast to 5.2%, down from 12%.

This in turn will allow the UK government to reduce its planned debt sales by much larger than the market had anticipated, slashed to just under GBP200bn. There had been wide expectation that the UK would reduce bond sales, however the size of the reduction took the market by surprise. The ten-year gilt rallied to .97% at one point, it traded at over 1.21% just 7 days ago. The thirty-year yields fell 1.12%, from over 1.51% a week ago.

As for the budget itself, the big winners were the NHS, public sector workers, banks, and drinkers. Sunak announced total departmental spending would increase by GBP150bn over this Parliament, representing the ‘largest increase this century’.

We also had the surprise decision by the Bank of Canada to end its QE program plus accelerating the potential timing of future interest rate increases. In a statement the BoC announced it would end its bond-buying stimulus program, as well as raising rates as early as the second quarter next year, alluding to Canada's robust economic growth, high COVID-19 vaccination rates, and strong employment gains.

Tiff Macklem, the Bank of Canada Governor, said of the decision ‘We now expect slack to be absorbed sooner, and that signals that we will be considering raising interest rates sooner than we previously thought.’ He added ‘if you want it in months, sometime between April and September’.