UK government bond yields have moved higher on news of increased government borrowing and infrastructure spending revealed by the Autumn Statement.
The Office for Budget Responsibility (OBR), the body responsible for the economic figures announced today, said lower growth and tax growth and tax receipts, plus increased spending, meant the government’s debt to GDP ratio would peak at 90 per cent in 2017/18 - the highest level in 40 years.
Ten-year gilt yields rose in response to chancellor Philip Hammond's announcement of the data. Yields peaked at 1.48 per cent, nearly 10 basis points higher than the day’s opening level.
The higher borrowing outlined by Mr Hammond means the UK’s Debt Management Office will issue an additional £15bn of gilts in this year alone.
“The market will now need to digest two index-linked and one nominal syndication within the next 12 weeks. This is a mammoth amount of supply to consume over the festive period,” said Craig Inches, Royal London Asset Management’s head of short rates and cash.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics added: "With the debt to GDP ratio now set to peak at 90.2 per cent of GDP, and bond markets beginning to be less tolerant of fiscal largesse, we doubt the chancellor will set fiscal policy actively to support the economy over the coming years.
"With monetary policy constrained by high inflation, the safety net for the economy going forward is remarkably thin."
The Autumn Statement, which saw a lack of major policy announcements compared with previous years under George Osborne - a fact celebrated by many - did involve a range of infrastructure policies which Mr Hammond believes will help the UK close its economic productivity gap.
However, Christopher Mahon, multi-asset investment manager at Barings, said the chancellor’s infrastructure plan was “upside down”.
He said the initiatives announced paled in comparison to existing projects such as the Heathrow runway expansion, the HS2 rail project, and the Hinckley nuclear power plant.
“The £2bn announced today is fifty times smaller than the amounts committed to the three mega projects alone."
Mr Hammond did also reveal plans for a £23bn "National Productivity Investment Fund", to be rolled out over the next five years, but Mr Mahon implied this would not be enough to cure the country's productivity problems.
“It is a great shame the chancellor continues to be seduced by the glamour of the mega and ignores the utility and timeliness of the micro. Britain seems to be locked into a type of topsy turvy spending dogma which results in the UK’s well known productivity stagnation.”
