The ONS’s report on public sector finances for March showed that public sector net borrowing fell from £72bn to £52bn year-on-year, thanks to an upswing in corporation tax receipts.
Receipts from corporation tax reached a record £55.6bn, expanding by 21% over the last year.
“The numbers have been slightly distorted by the treatment of dividends,” said Russell Silberston, portfolio manager in the Investec Multi-Asset Team.
“Dividend tax has changed and that’s been boosting receipts.”
Also, the healthier figures reflect the fact that “corporate profits have been quite buoyant and employment in the UK has been strong”, he said.
Meanwhile, the UK 10-year Gilt yield surged above 1.10% by mid-morning on Tuesday, but then fell back to the 1.09% mark by the afternoon.
Some analysts speculated that the slight slump in the price of UK Gilts was due to expectations of higher GDP for the first quarter, in addition to the reduction in government borrowing.
But Silbertson thinks these factors had little material impact on gilt yields.
“The market didn’t really even bat an eyelid,” he said, even in light the US where there is “a serious chance of a government shutdown later this week.”
“Gilts have reacted in line with US Treasuries and German bunds despite the much better than expected numbers.”
Rather, he thinks the greatest driver of bond yields with 10-year plus coupons is global interest rates.
