UK corporate borrowing costs soar as mini-budget fallout spreads

By Tommy Wilkes and Dhara Ranasinghe

LONDON (Reuters) -Borrowing costs for UK firms are soaring, with sterling corporate bond prices headed for their biggest monthly fall since the 1990s as fallout from the British government’s “mini-Budget” grows.

The Bank of England on Wednesday said it would start a temporary programme of long-dated UK government bond purchases to try to stabilise the market.

That, according to Vanguard credit portfolio manager Sarang Kulkarni, in turn helped ease conditions slightly in the investment grade bond market. Nonetheless, average yields there are still close to 7% – up from 5.5% last week before the British government spooked markets by announcing a series of tax cuts to be funded by borrowing.

“Today’s Bank of England announcement is intently expressed at bringing down that volatility. It’s too early to say this is over, there will potentially be more technical pressure across the market as everyone tries to raise liquidity,” Kulkarni said, estimating yields had fallen 10-15 basis points since the announcement. Yields and bond prices move inversely.

The sterling corporate bond market, much smaller and less liquid than the equivalent euro or U.S. dollar markets, is driven largely by moves in UK gilts, which have slid in value in recent days.

The Markit iBoxx Sterling Corporate Bond Index has fallen 10.2% so far in September to a price of 296 — its lowest since early 2016 and on course for the biggest monthly slide since at least 1999.

The ICE BofA Sterling non-Gilt Index, which measures the prices of investment grade debt, is also headed for its worst monthly performance since records began in 1997, down 9.8% to around 337 at Tuesday’s close, the lowest since late 2015.

“All the attention has been on gilts, but actually the pain on GBP investment grade corporate bonds has been even greater,” said Mike Riddell, fund manager at Allianz Global Investors, speaking before the BoE’s surprise announcement.

He said that liquidity in the corporate sterling market – not great at the best of times – was looking “almost non-existent” right now.

Jim Leaviss, a fund manager at M&G in London, said credit spreads across markets had been widening over recent weeks, but there was “definite underperformance” in the UK.

The British government’s Friday announcement of tax cuts triggered fierce selling of UK assets on concerns about the country’s finances, including sending the pound to a record low.

“The budget announcement has caused unintended consequences for the UK’s growth outlook,” said Vanguard’s Kulkarni. “Yields at 7% are a challenge for some companies, especially as we are going into a slowdown, but at the same time, well capitalised companies are also trading at attractive yields.”

(Additional reporting by Lucy RaitanoEditing by Marc Jones, Kirsten Donovan)