Investing.com – U.K. government bonds, known as gilts, sold off dramatically over the past week, pushing related yields to their highest levels since 2008 and putting pressure on the new Labor government as it seeks to stimulate Britain’s moribund economy.
Benchmark 10-year bond yields climbed as high as 4.9135%, up 8 basis points on the day, and jumped to levels not seen since August 2008.
British government bond yields have risen steadily since September, reflecting subdued expectations of a Bank of England rate cut, additional borrowing in the new government’s Oct. 30 budget and higher U.S. Treasury yields as President-elect Donald Trump is expected to pursue loose fiscal policy and raise tariffs.
While yields are also rising in other major economies, such as the US, France and Germany, the UK appears to be leading the charge.
These higher yields are likely to be a headache for UK Chancellor Rachel Reeves, as the extra cost of servicing the country’s debt could mean she exceeds her medium-term borrowing targets when she updates her forecasts on March 26.
“We estimate that the rise in yields so far leaves the government with marginally negative fiscal space relative to its deficit rule,” Goldman Sachs analysts said in a note.
“Any further rise in yields and any reduction in OBR growth on March 26 would push the space further into negative territory from here. While the government may not necessarily act quickly in response to the OBR update, a continued selloff in gold yields would increase pressure for corrective fiscal measures.”
In addition, higher yields are likely to act as an additional drag on growth through household reinvestment and weaker investment.
“The rise in gilt yields confirms our view that UK growth will disappoint in 2025, with our forecast for real GDP growth of 0.9% well below consensus (1.4%), the BoE (1.5%) ) and OBR (2%),” Goldman Sachs added.
Additionally, higher long-term interest rates weighing on the growth outlook would require more (rather than less) BoE rate cuts, all else being equal.
“A 25bp Bank Rate cut in February remains likely despite the gold selloff,” Goldman added, “unless next week’s wages and inflation data surprise materially to the upside. After that, we still see continued quarterly cuts throughout the year as economic activity disappoints.”
