Foreign investors ditch UK bonds over hard Brexit fears

Pic:Brexit: The sudden sell-off raises warnings over the state of the UK’s wider finances (EPA)
Business correspondent(wp/es):
Overseas investors sold off a record £17.2 billion in UK government bonds last month as political turmoil sparked hard Brexit fears, Bank of England figures showed on Thursday.

The alarming jolt to the confidence of foreign holders of the nation’s debt came as Theresa May’s floundering Government was rocked by the resignations of Foreign Secretary Boris Johnson and the Brexit Secretary David Davis.

They quit over her Chequers compromise agreement on leaving the EU, which faced immediate criticism from hard-line Brexiteers.

The net sales of gilts over the month are the biggest since the Bank of England started collecting records in 1982 and represent a huge spike compared with the £1.4 billion net sales in June.

Although foreign buyers have snapped up some £55 billion in gilts since the referendum in 2016, according to analysts at Jefferies, the sudden sell-off also raises warnings over the state of the UK’s wider finances. 

The UK runs a current account deficit, broadly its trade and investment standing with the rest of the world, of nearly 4% of GDP, which has to be funded by government borrowing. 

In the words of Bank of England Governor Mark Carney, that leaves the UK dependent on the “kindness of strangers” to fund its deficit. If sustained, foreign sales of gilts would inevitably drive up debt costs for the UK and feed through to the UK economy in higher interest rates.

David Owen, chief European financial economist at Jefferies, said July was a “month of heightened political concern”.

He added: “This underlines the importance of managing the UK’s exit from the EU as smoothly as possible, especially given the ongoing need to help finance the UK’s current account deficit.” 

The Bank’s figures also painted a picture of flagging momentum in the housing market and retrenching consumers.

Approvals for new home loans eased to 64,768 in July amid caution ahead of the Bank’s widely flagged interest rate rise at the beginning of this month.

That was lower than 65,000 pencilled in by City economists. The London market is the worst-performing region in the UK according to official figures.

Consumer credit grew at an annual pace of 8.5% in July, the slowest since November 2015, which should ease nerves in Threadneedle Street over shoppers drowning in personal debt.