The numbers
The UK's 30yr gilt yield broke above 6% yesterday for the first time since 1998. The 10yr topped 5.5%, its highest level since 2007. The FTSE 100 fell 1.7% to 10,428, its worst session since May.
The reaction of equities was revealing. Banks, which might normally benefit from higher rates, fell 4–5%, with NatWest down 5.4%. Housebuilders, which had surged 10-15% on Monday after the launch of Your First Home, gave back significant gains and Nationwide added to the housing concern by reporting annual house-price growth of just 0.8% in September. The market is starting to price the bill behind the announcements.
Global sell-off or British problem?
Paradoxically, both may be true at the same time. This is not a rerun of 2022 & the UK is not being singled out by a sudden fiscal shock. Yields on US 10yr notes touched 5.3% and long-dated yields are rising across the G7 as inflation proves stickier than expected. In the US, the ISM manufacturing survey showed prices paid jumping to 77.9 in September. Britain is being hit by a global repricing of what money costs.
But gilts have also been among the weaker major bond markets this autumn, which matters because Britain has less fiscal room to absorb increases to its interest bill. August borrowing was the second-highest on record, while debt interest alone came to £8.8bn. Equities told the same story: while the FTSE 100 and the big European indices fell between 1% and 2% yesterday, Wall Street closed almost flat.
The Budget is now part of the market
The problem for Westminster is the market has become less tolerant of uncertainty. The government announced the Your First Home scheme ahead of the Budget, while saying it will be funded by "reprioritising existing budgets". The less detail in the commitments, the higher the price the gilt market charges for the uncertainty.
For Westminster & the Treasury, the message is straightforward: investors don't want more vaguely priced policies. They want to see careful arithmetic.
The corporate read-through
For companies, 6% is not just a headline. It changes the reference point against which companies are financing, investing and valuing future cash flows. Higher long-term government yields feed into corporate borrowing costs, hurdle rates, pension assumptions, property valuations and equity-market discount rates. Projects that made sense when capital was cheap have to be reassessed when the risk-free alternative is materially higher.
For companies communicating with investors, the market is increasingly asking three simple questions: what does it cost, when does the return arrive and how is it being financed?
Tech whiplash: when a record quarter isn't enough
Wall Street provided the other side of yesterday's lesson. Micron reported a record quarter and guided well ahead of expectations, yet its shares fell as much as 3% at one point, before swinging round to close up 3% at $1,097. That's whiplash. The issue wasn't missed guidance or bad numbers. It was that the market had already priced in an extraordinary set of results. Morgan Stanley noted that Micron had previously been beating and guiding ahead of expectations by roughly 20–40%. This time the beat was closer to 5–6%.
Spending was another area of concern. Micron expects capex of circa $25bn in H1 of its 2027 financial year as it races to expand supply. Strong demand is excellent, but it also requires enormous investment to satisfy it. Which raises the question: what happens if that demand suddenly evaporates while you are still writing those capex cheques?
The valuation conundrum was nicely summed up by Michael Cuggino of Permanent Portfolio on CNBC: the S&P 500's earnings yield is around 4.5%, roughly comparable with what investors can now obtain from shorter-dated government bonds. That changes the competition for capital. When the risk-free alternative becomes more attractive, every equity valuation has to work harder.
The Comms Read
Yesterday's market action carries a broader lesson for management teams: managing expectations isn't just something you need to do when bad news could land. Micron's problem was investors had already moved their expectations to a level of stratospheric proportions.
The same dynamic applies across markets. The question is no longer simply whether the story is good, but whether the returns justify the capital required to deliver it. That is a useful discipline for boards, CFOs and IR teams heading into a world where money is no longer free.
What to watch today
US jobs: today's employment report lands at 1.30pm UK time & a strong number could reinforce pressure on Treasury yields and, by extension, gilts.
Over the weekend
OPEC+: the core group meets on Sunday, and Reuters reports it is expected to keep output targets unchanged. Oil only dipped below $100 on hopes for US-Iran talks. Those stalled again this week, and Brent jumped more than 4% on Thursday to back above $102. No help from OPEC+ and no progress on Iran would leave inflation worries, and yields, where they are.
The Sunday papers: with the Budget four weeks away, expect the weekend briefings to continue. That's exactly the kind of trailing the gilt market is now charging for, so watch for any fiscal announcements, or changes to the fiscal rules, floated over the weekend.
Monday's open: the weekend gives markets time to digest Friday's jobs number. How gilts open on Monday will tell you whether this is still a global story, or an increasingly British one.
In 2022, the bond market punished one bad Budget. This time, it is warning before the Budget has even happened.
Time will tell. GLA & DYOR.
Disclaimer
This newsletter is published by James Lea / CorpCast for general information, educational and journalistic purposes only. Nothing in it constitutes financial, investment, legal or tax advice, or a personal recommendation, and it is not an offer, invitation or inducement to buy, sell or hold any security, cryptocurrency or other financial instrument.
Any views, opinions, forecasts or interpretations expressed are the author's own personal opinions at the time of publication, do not reflect the views of any business or entity the author is affiliated with, and may change without notice. No account is taken of any reader's personal circumstances, objectives or financial situation, and nothing here should be relied upon as the basis for any investment decision.
The author may from time to time hold long or short positions in securities, cryptocurrencies or other assets referenced in this newsletter, and may transact in them at any time without further notice. This is a standing disclosure covering all issues and is not repeated or itemised per asset.
Investing and trading involve substantial risk of loss, including the potential loss of your entire investment. Past performance is not a reliable indicator of future results. Figures, data and third-party information are believed reliable but are not guaranteed to be accurate, complete or up to date.
James Lea / CorpCast is not authorised or regulated by the Financial Conduct Authority. Always conduct your own independent research and consult a suitably qualified, FCA-regulated financial adviser before making any investment decision.