Word leaked that new UK Prime Minister is planning a £130 billion plan to subsidize household energy bills over the next 18 months. Support for businsesses will be on top of that.
In Europe there are similar plans (Switzerland today included) and the playbook is now clear. Just like covid, the government will take on all the costs.
The problem this time is that central banks aren't cooperating. QE is ending and central banks are raising rates as inflation hits. That's leading to a revolt in the bond market.
Gilts are particularly instructive because aside from this, Truss is also promising to lower corporate taxes. Today alone, gilt yields are up 19 basis points and have broken the 2014 to the highest levels since 2011.
It's not just the UK either today:
- German 10s +7 bps to 1.64%
- US 10s +16 bps to 3.35%
- Canada 10s +15 bps to 3.24%
There's a growing risk of disorderly moves in the bond market. The ECB is slowly rolling out its spread-protection regime and QE continues there so there is a counterbalance but at some point the bill will come due for all this spending. This is a double shock and is supercharged by inflation. With governments subsidizing energy use it also means that more energy will be used and that will keep prices high -- adding to either inflation or government debt.