By Geoffrey Smith
Investing.com -- U.K. government bond prices opened sharply higher on Monday in anticipation of a comprehensive about-face by the British government on its ill-fated plans to slash taxes.
Yields on some U.K. Gilts, which move inversely to prices, fell by over 20 basis points on expectations that the new Chancellor of the Exchequer, Jeremy Hunt, will effectively abandon almost all of the measures announced only a couple of weeks ago by his predecessor Kwasi Kwarteng.
The pound, meanwhile, pared overnight gains to trade 0.8% higher at $1.1263. Against the euro it was up 0.6% at 1.1555.
Hunt is due to make a statement at 06:00 ET (10:00 GMT), according to a release from the Treasury early on Monday. That will be followed by another statement to the House of Commons.
The government is hoping to end the turmoil created by Kwarteng's disastrous "mini-budget" in September, which proposed the biggest tax cuts in 50 years at a time when the U.K. economy is already suffering from high inflation. Kwarteng's measures had pushed the pound to an all-time low against the dollar and triggered a rout in government bonds, forcing the Bank of England to intervene to stop the collapse of a large part of the U.K.'s pension system.
Kwarteng was dismissed by Truss on Friday as she tried to salvage a premiership that is less than two months old by reinstating a planned increase in corporate income tax that Kwarteng had scrapped. However, the Gilt market had continued to sell off, after Truss stood by most of Kwarteng's other measures.
Over the weekend, various U.K. media reported that the Office for Budget Responsibility had warned the Treasury that Kwarteng's initial plans would have created a funding gap of over 70 billion pounds by 2027.
The Bank of England ended its direct support for the bond market on Friday, having bought just under 20 billion pounds of conventional and index-linked Gilts over the previous two weeks to head off what it called "a material risk to U.K. financial stability." It had earmarked a maximum of 65 billion pounds.
By 03:30 ET, the yield on the benchmark 10-Year Gilt was down 20 basis points at 4.13%, while the two-year Gilt, which more directly reflects expectations for Bank of England policy, was down by a similar amount at 3.67%. The 30-Year Gilt yield, arguably the clearest reflection of long-term confidence in the pound and the British economy, fell 25 basis points to 4.53%.