Surging gilt yields created stress for an estimated £1.6 trillion ($1.8 trillion) in U.K. corporate pension funds’ liability-driven investment portfolios.
The new plan removes most of the unfunded tax cuts in a move to calm the markets.
“Following conversations with the Prime Minister, the Chancellor has taken these decisions to ensure the U.K.’s economic stability and to provide confidence in the government’s commitment to fiscal discipline,” Mr. Hunt’s office said in a statement.
The chancellor’s statement did calm the gilt market, and gives pension funds “breathing space and more time,” said Bethany Payne, global bonds portfolio manager with Janus Henderson Investors. “The immediate impact is to reduce the pressure to source further liquidity to meet collateral obligations,” Ms. Payne said in an emailed statement.
Still, while market turmoil has eased, political uncertainty “has probably increased,” said Neil Birrell, CIO at Premier Miton Investors. “For investors outside the U.K. looking to commit money here, this see-sawing can’t help our case,” he said in an email.
The government’s “monumental economic U-turn” is likely to lead to Ms. Truss’ departure, said Neil Mehta, portfolio manager with BlueBay Asset Management. While it eases pressure on the Bank of England to hike rates, “the U.K. economy faces long-term challenges regardless, as it enters a period of slumpflation,” he said in an emailed statement.
Mr. Hunt also promised “more difficult decisions” ahead on tax and spending, which will be unveiled October 31.
In fact, in speech to Parliament on Monday, Mr. Hunt said the government will make “decisions of eye-watering difficulty” to restore confidence.
He also announced formation of an economic advisory council from the private and public sector to help the government. The group “will meet regularly to discuss U.K. and international economies and financial markets,” his office said in a statement.
Members named so far have extensive experience working with previous chancellors and Bank of England policymakers. They are Karen Ward, managing director and chief market strategist for EMEA at J.P. Morgan Asset Management; Gertjan Vlieghe, chief economist for U.S. hedge fund Element Capital; Sushil Wadhwani, CIO for QMAW, originally founded as Wadhwani Asset Management; and Rupert Harrison, a BlackRock managing director, portfolio manager and head of research for the diversified strategies team in the multiasset strategies and solutions group.
