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Britain’s 10-year borrowing costs rose to their highest level since the global financial crisis and the pound sank on Wednesday as a widening bond selloff threatened the Labor government’s ability to meet its self-imposed budget rules.
10 years old gilded the yield climbed as much as 0.12 percentage points to 4.8 percent in late morning trading — its highest level since October 2008, according to Bloomberg data. Yields move inversely with prices.
The yield on 30-year gilt – which rose to its highest level since 1998 on Tuesday – also continued to rise, touching 5.36 percent.
Sterling fell 1.1 percent against the dollar to $1.233, its lowest level since April. On the stock markets, the domestic FTSE 250 index fell 1.7 percent.
Investor concerns about higher UK borrowing, weak growth and persistently high inflation have fueled the sell-off since the October Budget.
Chancellor Rachel Reeves left herself a slim £9.9bn of headroom against her revised fiscal rules in the Budget, even after she announced a £40bn package of tax rises aimed at “wiping everything out” of the public finances.
Since then, rising yields on government debt have put that fiscal wiggle room at risk. The level of bond yields is an important determinant of budget space given its implications for the government’s interest bill, which exceeds £100 billion a year.
Wednesday’s latest rate hike means the chancellor’s option against the current budget rule has now been wiped out, according to Ruth Gregory of Capital Economics.
If higher yields hold, it could force the chancellor to announce corrective measures to keep fiscal policy on track. On March 26 of the year Office of Budget and Accountability announces a new set of fiscal forecasts that will take into account developments in bond yields.
“If bond yields rise further, Reeves could be forced to make an economically damaging decision to raise taxes further or cut planned public spending to balance the books,” said Kallum Pickering, chief economist at Peel Hunt.
The chancellor pledged to make significant tax changes only once a year, in one “fiscal event”. The next one is expected only in the fall.
The recent decline in the gilt market comes after weeks of rising yields on longer-dated US Treasuries and German government bonds, although Wednesday’s sell-off was sharpest in the UK.
Analysts say the simultaneous sell-off in gilts and the pound — which usually benefits from higher yields — carries echoes of the market crash from Liz Truss’ ill-fated “mini” budget in 2022.
“What’s happening in the gilt market has undermined confidence in the pound a little bit,” said Chris Turner, head of financial markets at ING, saying some investors had backed out of recent bets that the pound would be more resilient than other major currencies against currency. dollar.
“FX traders are watching the gilt market and worrying about whether something similar will happen by 2022,” Turner said.
