Borrowing costs in the UK will ultimately determine how far sterling needs to fall to plug the country’s external deficit. Bonds and sterling have sold off sharply in recent days (notwithstanding today’s relief rally), but it’s the market with the lower liquidity – gilts – that will be the main determinant of sterling’s performance. Five-year gilt yields are at around 4.6%, from only 3% earlier this month. Around 25% of the gilt market is held by overseas investors, so government borrowing costs are very sensitive to capital that could easily find an alternative home (and some surely has already). When government ... (full story)