GBP - Beware

Just reading an article  that places  the  GBP  in  quite a  nasty looking picture..

The yield on Britain’s 10-year gilt just shot up to about 4.2 per cent, according to Reuters data.
Unfortunately you can’t see it in the below Bloomberg charts, since the American newswire appears to be using a March 2019 benchmark (Reuters is using a 2020 one), but they should give you some idea.
Using the 4.2 per cent Reuters yield, the spread between 10-year UK gilts and German bunds is now about 100bps. Oh dear.
The jump is probably down to just-released UK deficit data. Net borrowing at the UK Treasury was over £9bn higher in January than a year earlier, while the deficit was £4.3bn compared with a £5.3bn surplus the same time last year.
Running a deficit in the first month of the new year is rather unusual for British public finances…
As Gary Jenkins at Evolution Securities puts it:
The UK posted its first January budget deficit since records began in 1993; the numbers are horrendous. January is the biggest tax collecting month and therefore usually shows a budget surplus. The deficit of £4.3bn is against an expected surplus of £2.6bn. The UK deficit now looks on course to overshoot the Pre-Budget Report’s estimate by some £10bn, and any underfunding this year will add to next year’s already high borrowing requirement. The estimate was for £213bn of gilt issuance in Fiscal 2010/2011 before today’s release. That compares to £225.1bn of gilt issuance this financial year, but this year’s supply was eased by the Bank of England buying about £180bn of gilts through its Asset Purchase Facility, whereas next year’s issuance has to be absorbed in full by the market, a more than fivefold increase in issuance net of QE. Thus it is likely that the QE program will be increased. With large budget deficits in other countries the UK will have to compete for funds and the recent support for Greece from the EU may lead to investors demanding higher yields to hold UK debt as the higher yielding weaker Eurozone countries could be seen as having an implicit guarantee from stronger Eurozone members, although clearly this has not yet been fully tested and uncertainty abounds. 10 year Greek government bonds currently yield 6.5%, the Portuguese yield is around 4.65% and 10 year Gilts trade at 4.20% While it is still more likely than not that the rating agencies will wait until after the general election to put any pressure on the AAA/Aaa ratings these numbers are so bad that we cannot rule out them taking a look at the rating pre election. At least HM Revenue and Customs can look forward to higher than usual revenues in August when banks are due to pay the 50% bonus tax estimated of up to £5bn, well ahead of the £550m allowed for in the PBR….