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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. Hello, I'm Stephen Carroll.

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Speaker 1: Welcome to this special Bloomberg Daybreak Europe podcast. UK government's

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Speaker 1: borrowing costs hit a new milestone at the start of

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Speaker 1: trading today, the yield on the thirty year bonds hit

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Speaker 1: its highest since nineteen ninety eight. It adds more pressure

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Speaker 1: on Prime Minister Caer Starmer's government to take steps to

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Speaker 1: restore the confidence of markets ahead of the budget next month.

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Speaker 1: Joining us to discuss our chief UK economist Dan Hansen

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Speaker 1: and Bloomberg opinions Marcus Ashworth as well. Marcus, I'd like

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Speaker 1: to start with you, as our resident bond market expert,

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Speaker 1: what is driving yields to these levels and what's the

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Speaker 1: significance of the milestone we're seeing in the thirty year.

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Speaker 2: I don't think this is a particularly UK focus crisis.

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Speaker 2: If it's a crisis here, this is just global bond yields,

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Speaker 2: particularly long in yields, driven the moment by the US.

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Speaker 2: We can see US yields going up and the thirsty

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Speaker 2: year is getting close to five percent again.

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Speaker 3: So that's what's wirying people stacewise.

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Speaker 2: So we've got France having a political shake up, and

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Speaker 2: obviously we did have some quite substantial news look yesterday

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Speaker 2: that look it looks Star Rachel Reeves's career is over

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Speaker 2: and she's being boxed in comprehensively, and Darren Jones will

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Speaker 2: be either than the next chance or if he plays cars,

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Speaker 2: I could be the next Prime minister at this rate.

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Speaker 2: So I think there's a significant downgrading of the Treasury's influence.

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Speaker 2: That makes some people a little nervous, perhaps because you

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Speaker 2: know what will happen next while they drop the OBI rules,

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Speaker 2: there's all that sort of stuff.

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Speaker 3: But we're seeing a set off in the pound, which means.

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Speaker 2: That some people think that you know, interest rate is

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Speaker 2: going to have to beake up as I don't know

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Speaker 2: what the markets are sending us a bunch of different signals,

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Speaker 2: but I mean the practical reality is the real reason

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Speaker 2: we're alph a bit today is there's a big tenure

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Speaker 2: synplicated sale tomorrow and dealers are hedging ahead of that

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Speaker 2: and there's nothing there at the moment to buyers to

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Speaker 2: come out in the long end. We know that for

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Speaker 2: quite some while it's the pension funds don't want it,

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Speaker 2: so it's very easy to push the market get things

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Speaker 2: cheaper for a nice, loving cheap cell.

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Speaker 4: Tomorrow, Dan, let me bring you in here. I wonder

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Speaker 4: if your interpretation is that there's curtains for Rachel Reeves

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Speaker 4: as it is in Marcus's interpretation, And really, even if

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Speaker 4: the cause of this yield move, as he says, is international,

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Speaker 4: what the domestic consequence is because surely this is going

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Speaker 4: to hurt her headroom.

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Speaker 3: To some extent.

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Speaker 5: Yeah, I think something one thing we have to be

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Speaker 5: really careful about is you have to think about where

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Speaker 5: the DMO is issuing debt at the moment, and it's

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Speaker 5: issuing debt at at the shorter end of the year curve,

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Speaker 5: and it's made a significant shift away from the longer

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Speaker 5: end of the yell curve. So focusing on thirty year

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Speaker 5: guilt is not a good barometer for whether she is

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Speaker 5: getting more or less headroom as a result. If it's

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Speaker 5: a reflection of what's happening along the rest of the

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Speaker 5: yeal curve, then yes, of course. But if the curve

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Speaker 5: is steepening, just because the thirty year yield is up

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Speaker 5: whatever it is, five basis points doesn't mean it affects

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Speaker 5: where the DMO is issuing debt. Because as Marcus just

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Speaker 5: said there there has been this huge shift in demand,

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Speaker 5: and the DMO is shifting supply to match that around

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Speaker 5: the numbers before I came in the studio though, because

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Speaker 5: I knew you want we're going to ask me something

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Speaker 5: something like that. It's as if we talk before we

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Speaker 5: go on air, Lizzie and I think, if you run

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Speaker 5: it the back of the envelope, it takes about eight

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Speaker 5: billion away. So she had ten billion of headroom all

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Speaker 5: else equal. Imagine the whole world is unchanged apart from

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Speaker 5: this moving guilt yield, she would have two billion of headrooms.

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Speaker 5: Because so you wipe out nearly all the headroom just

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Speaker 5: based on the moving guilt yield. Of course that doesn't

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Speaker 5: take accounts of the policy U turns that we've had

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Speaker 5: and also of course the potential for the obr's downgrade

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Speaker 5: its outlook.

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Speaker 1: Okay, so that doesn't leave a very healthy vesical calculations

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Speaker 1: for the upcoming budget. I mean, what does the chance

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Speaker 1: for need to rethink. I suppose what the markets want

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Speaker 1: in terms of headroom this time around, because clearly the

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Speaker 1: vulnerabilities that we've seen over the past year have told

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Speaker 1: us you know that was left the last time wasn't

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Speaker 1: it enough.

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Speaker 5: I mean, I think that's exactly what needs to happen.

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Speaker 5: And I mean there is this, of course, you have

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Speaker 5: to be realistic about. You know, if the OBR hands

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Speaker 5: her a really difficult forecast, there's only so much she's

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Speaker 5: going to be able to do to get back and

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Speaker 5: go to this, go back to even where she was

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Speaker 5: at the start of the nine point nine billion, as

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Speaker 5: you said, Lizzie, but I think it would be extremely

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Speaker 5: prudent on her part to just take a step towards

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Speaker 5: building more headroom. Now it might not be that she

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Speaker 5: gets to the levels that we've seen in the past,

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Speaker 5: or on average chancellors have left themselves about twenty five

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Speaker 5: billion pounds worth of headroom, so she's miles away from that.

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Speaker 5: But even if you know you built, if you send

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Speaker 5: the message that you are moving, you are aiming to

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Speaker 5: move towards that, of course, knowing depending on whether she's chancellor,

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Speaker 5: to pick up on what Marcus says, knowing that come

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Speaker 5: the next election, you will have a war chest to spend.

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Speaker 5: That's how George Osborne did it, so you will have

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Speaker 5: a war chest to spend.

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Speaker 3: Desperate to say.

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Speaker 5: Something, then Lizzie, just from a minute. I think that

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Speaker 5: would be a really important message to the market, because

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Speaker 5: as things stand, we're in a merry go round, aren't We.

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Speaker 5: We have this conversation every six months, and it's not

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Speaker 5: just that it's affecting markets and yields. It's affecting how

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Speaker 5: people spend and what they're doing in the real economy.

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Speaker 4: But you know what I'm going to say to you, Dan,

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Speaker 4: is that politically realistic? Yes it may make economic sense. Yes,

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Speaker 4: it may help to calm the market. But can Rachel

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Speaker 4: Reeves and kirs Armer afford to put more spending cuts

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Speaker 4: or more tax rises past the left wing of the party.

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Speaker 4: I know that that's more of a political question. Let

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Speaker 4: me put it to Marcus. Marcus, can you see that

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Speaker 4: happening in reality?

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Speaker 2: Well, I think they made room for themselves to be

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Speaker 2: able to drop Rachel reason probably with that the OBR

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Speaker 2: fiscal rules to some degree, and clearly, as I said,

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Speaker 2: I think they've got Darren Jones in there and they'll

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Speaker 2: be watching like a hawk anything that torsent Bell comes

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Speaker 2: up with cursin minus Shafik in number ten as well,

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Speaker 2: So that gives them, I think at some point more

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Speaker 2: flexibility when they will ditch I think Rachel reeves, and

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Speaker 2: they will therefore be a change, but they'll have the

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Speaker 2: replacement in place almost. But yeah, I think fundamentally, if

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Speaker 2: they wish to get reelected at some stage in twenty

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Speaker 2: twenty nine, they have to do something seismic, and I

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Speaker 2: think they're going to have to grow the economy properly,

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Speaker 2: and at some point they're going to have to break

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Speaker 2: Manifesto propernesses, whether it's on tax or a number of

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Speaker 2: different things, or get very busy indeed with their backbenches,

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Speaker 2: and indeed cut spending, which.

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Speaker 3: Is really what the market wants.

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Speaker 2: The market doesn't want tax hikes per se. I mean

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Speaker 2: it's better than nothing because they'll make the numbers where

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Speaker 2: they know the economy will suffer badly for it. They

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Speaker 2: do want government spending cuts, and at some point, some

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Speaker 2: somewhere has to deliver it, and I think they will

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Speaker 2: have to have another go at this. It's going to

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Speaker 2: be difficult, but I think they'll need to get the

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Speaker 2: budget out of the way cleanly first and then move

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Speaker 2: on to the second stage of this very rocky first

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Speaker 2: level comment.

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Speaker 1: For a while, But Marcus, how would markets react to

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Speaker 1: a scrapping of the fiscal RULs at this stage.

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Speaker 3: I don't think.

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Speaker 2: They'd care as much as people fear they would, as

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Speaker 2: long as it's done in a sustainable fashion, which is

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Speaker 2: going to be growth positive and makes sense, rather than

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Speaker 2: this ridiculous hair shirt that she She strapped herself too

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Speaker 2: deliberately thinking it was clever and made mistake up a

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Speaker 2: stake literally day one.

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Speaker 4: Do you not remember what happened in the markets when

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Speaker 4: Rachel Reeves cried. I mean they said that that was personal,

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Speaker 4: but even the idea what she was crying about. No,

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Speaker 4: but the idea that Starmer would replace Reeves triggered that

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Speaker 4: sell off in the guilt market. Surely it can't be

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Speaker 4: the case that the market would just accept them tearing

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Speaker 4: up or tweaking the fiscal rules. Dan wants to come,

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Speaker 4: and he's put his hand up because I'm the teacher.

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Speaker 3: She tried that in the October budget.

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Speaker 5: She tried to loosen the fiscal rules and invest loads

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Speaker 5: of money, and the are said, yeah, I'll lift the

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Speaker 5: economy a bit, but not very much.

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Speaker 3: So it's just it's really difficult.

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Speaker 5: I mean, it feels to me like the trade off

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Speaker 5: is between, as Marcus says, ideally lower spending and day

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Speaker 5: to day spending or high attacks or volatility and financial

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Speaker 5: markets and higher guilt yields. So you just have to

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Speaker 5: pick your poison, really and you depend it depends which

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Speaker 5: way around you want it, because the market is going

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Speaker 5: to react if you don't have these fiscal rules in place,

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Speaker 5: I think, and if you loosen them, I think there

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Speaker 5: would be a I'm not as I'm not as I'm

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Speaker 5: not as relaxed as Marcus is about it, because I

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Speaker 5: just feel that they would they would react poorly.

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Speaker 3: But I wish, I hope, but I hope he's right.

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Speaker 3: Of course, I'm very lacked doan in.

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Speaker 2: The context that if there's something sensible, an actual physical

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Speaker 2: plan which makes makes common sense, yeah, absolutely dramatically got

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Speaker 2: to be something which the market can buy and look

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Speaker 2: past a a you know, a few more guilts being

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Speaker 2: sold and this that the other. If it actually ends

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Speaker 2: up making some form of logical sets. But one thing

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Speaker 2: she has done recently is very much reduced as Dan

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Speaker 2: and allude too early, but the second time she's reduced

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Speaker 2: an amount of duration of guilts that are going to

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Speaker 2: be sold.

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Speaker 3: I mean there is almost no long.

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Speaker 2: End insuance coming in the next three months. In fact,

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Speaker 2: more coupons we paid out than the fact they're raising

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Speaker 2: money and the long end so we've got a big

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Speaker 2: tenure tomorrow, which is really what I think is driving

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Speaker 2: this particular sell office as saying, you actually look at

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Speaker 2: the rest of Europe, France, et cetera, Italy, they're off

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Speaker 2: hirghing yield this morning. So it's not a UK specific

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Speaker 2: move this, but there is a big auction. It's ten years.

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Speaker 2: You'll find as almost no linkers coming in beyond ten years.

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Speaker 2: There's very little long end supply. She shortened that duration hugely.

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Speaker 2: She's getting out of her own way and the debt

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Speaker 2: management Office is doing an excellent job for her in

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Speaker 2: that sense, and we have a lot less exposure.

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Speaker 3: We need to have a lot less exposure long end.

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Speaker 2: But they've moved very quietly, but very very firmly in

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Speaker 2: the right direction, which should make.

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Speaker 3: All this less dramatic.

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Speaker 2: But you just put then the context of how how

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Speaker 2: much yields are up, and they've reduced guilty guilt duration

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Speaker 2: by so much. My word, if they hadn't done this,

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Speaker 2: we would have been a little bit above six percent.

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Speaker 1: I suspect by now, Dan, if I mean Van Ramer

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Speaker 1: and Market's live blog is rising that if the Salaf

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Speaker 1: and girls continues, the chance I would have to say

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Speaker 1: something before the budgets. How likely does any sort of

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Speaker 1: pre budgets announcement.

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Speaker 3: Look to you?

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Speaker 5: Not very high at the moment, I don't think. I mean,

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Speaker 5: as Marcus has said, there there's so much of this

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Speaker 5: is global first of all, so and I don't think

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Speaker 5: the government's going to want to be seen to panic

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Speaker 5: about this. The other thing is if you come out

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Speaker 5: and say something, you need a plan, it needs to

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Speaker 5: be marked by the OBR. It's just obviously silence isn't great.

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Speaker 5: But I think coming out and just saying anything or

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Speaker 5: something would probably spark more more concerned than just waiting

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Speaker 5: and doing the full going through the full process with

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Speaker 5: the OBR. I think that's that's a really important bit

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Speaker 5: of this as well, is what they say, what they

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Speaker 5: say around it, because what you don't know at the

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Speaker 5: moment is what they're thinking. You know, it's possible we're

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Speaker 5: getting ahead of ourselves and they're not thinking about making

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Speaker 5: a big growth downgrade, you know, and that would mean

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Speaker 5: that the work she has to do at least to

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Speaker 5: restore the ten billion of headroom would be less. Of course,

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Speaker 5: I would argue that in that case you would try

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Speaker 5: and build the headroom further so the sort of the

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Speaker 5: amount of tax rises or spending coutchichever when it might be,

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Speaker 5: would be similar. But I think it would just spark

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Speaker 5: panic if she If she did that, I think, but.

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Speaker 3: There may well be.

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Speaker 5: What I would potentially guess is that there will be

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Speaker 5: a statement alongside the announcement of the budget date. She

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Speaker 5: might make a statement in Parliament to sort of set

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Speaker 5: out the strategy for the budget if you like, to

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Speaker 5: try and to try and calm nerves. But I think

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Speaker 5: that'll be as that would be as far as it goes.

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Speaker 5: It won't be sort of pre announcing any sort of policy.

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Speaker 2: I had one quick thing here which we haven't mentioned,

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Speaker 2: as the Bank of England.

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Speaker 4: I was going to ask you this, Marcus, because you've

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Speaker 4: got your column out about how Andrew Bailey isn't helping

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Speaker 4: matters with his rehetoric.

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Speaker 2: I've got one coming out tomorrow it seem worse. No,

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Speaker 2: there was mostly about the guilt stuff I've already mentioned here.

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Speaker 3: But the point here is that if the Bank.

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Speaker 2: Of England does not stop long end active contivated tightening

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Speaker 2: as in selling of the long end portfolio. At their

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Speaker 2: next meeting, then we will have a bit of a crisis.

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Speaker 2: So the market is very much expecting a reduction. I'm

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Speaker 2: Dan's done a wonderful piece on this. They'll probably cut

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Speaker 2: it back quite a lot from what they thought it

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Speaker 2: would be. In practical terms, it makes no real change

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Speaker 2: from last year, but in overall amount they sell, both

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Speaker 2: through passive runoff and.

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Speaker 3: Then indep active will will go.

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Speaker 2: Down to be saved from one hundred to sixty sixty

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Speaker 2: five something like that, and within that the active sales

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Speaker 2: will be around the same as this year. But more importantly,

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Speaker 2: we waited very much to short medium terms. I not

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Speaker 2: take the massive losses that they've done on long end

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Speaker 2: guilts up till now, which has destroyed the long end

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Speaker 2: of the guilt market. Even David Ramsen's mentioned it could

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Speaker 2: take up to twenty five basis points in yields. I

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Speaker 2: think it's quite sucumpany more than that. But the point

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Speaker 2: is if that doesn't come in for the Bank of England,

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Speaker 2: then reg Jewelryes has a much much harder task.

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Speaker 3: Okay.

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Speaker 1: Marcus Ashwrothloomberg Opinion Columist and our Chief UK economist, Dan Hansen.

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