Consumers face a worse outlook for their borrowing and investments because of the UK debt market sell-off which has deepened since the new year.
Yields on UK government bonds, along with US Treasuries and other government bonds, rose as investors expect interest rates to stay higher for longer due to weaker-than-expected inflation.
This was helped by investor concerns over higher borrowing from the October budget and fears that the UK could enter a period of stagflation, where persistently higher prices limit the Bank of England from cutting interest rates to stimulate the economy. The selloff lifted the yield on the 10-year gilt bond from 3.75 percent in mid-September to as high as 4.93 percent on Thursday.
FT Money explores what all this means for your finances.
Mortgages
The sales will have the biggest impact on those looking to remortgage or buy a home in the coming months, as fixed interest rates mortgages driven by market expectations about where interest rates might move.
Swap rates, which track those expectations and are used by lenders to price their fixed-rate products, have risen sharply from just below 4 percent in mid-September to more than 4.5 percent this week.
So far, reaction to the sell-off has been limited. “We’re starting to see that feed into the narrative. . . we’ve already seen fixed rate mortgages rise slightly, but nothing too radical has changed in the last few days,” said David Hollingworth, director of mortgage broker L&C.
The average two-year fixed interest rate fell one basis point last week to 5.47 percent, while the average five-year rate rose a basis point to 5.25 percent, according to Moneyfacts, a financial data firm.
“We’re a world away from a mini-budget,” Hollingworth said, referring to the Truss government’s 2022 fiscal statement, which sent borrowing costs soaring and immediately hit mortgage rates. “The mini-budget came out of the blue and the markets had to adjust very quickly. Lenders were almost unable to set a price [mortgages] due to volatility. We don’t see that right now.”
That said, if you’re considering buying a home or need to remortgage, the advice is not to hold back.
“Five-year fixed rates are still quite cheap now, especially if you have a bigger deposit,” said Aaron Strutt, director of mortgage broker Trinity Financial. “If rates are going to rise in the short term, so will your mortgage [for renewal] coming up in four months, it makes sense to sign a new contract now and then potentially switch to another if rates come down.”
Pensions
Those in their 20s and 30s and far from retirement have little to fear from the bond turmoil — in the long run, when it comes to their pensionssaid Sir Steve Webb, partner at pensions consultancy LCP and former Liberal Democrat minister.
But older people whose pensions are “lifestyle” may want to pay close attention as their investments have shifted from stocks to bonds, said Olly Cheng, senior director of financial planning at wealth management firm Rathbone.
However, “unless you’re completely loaded with long bonds, it’s not time to panic,” said Laith Khalaf, head of investment analysis at AJ Bell.
The “best thing” to do for those with long exposure to bonds is to “try to leave the pot alone and, if possible, delay the withdrawal,” Webb said. “What we’ve seen before is people panicking and selling what they have, crystallizing their losses. If you hold out, you don’t know how long or how much, but bond prices might [go back up].”
Higher yields tend to result in lower annuity prices, and with pensions subject to inheritance tax from 2027, the income guaranteed by annuities could look attractive to retirees.
Khalaf warned: “The problem with annuities is that you lock them in for life. They are good for creating a secure stream of income, but it will disappear completely when you die. You can build in some protections, but that will reduce the rate you get.”
Savings
Most experts say waves in the bond market will have little direct impact on savings rates in the short term, which are driven by the Bank of England’s base rate, which currently stands at 4.75 percent.
“The bond drama is unlikely to jolt the savings market at the moment – it’s not a knee-jerk reaction,” said Mark Hicks, head of active savings at investment platform Hargreaves Lansdown. “If yields do not fall in the coming days, as the market more fully digests the news from the US, we could see a further increase in expectations for a rate cut.”
Currency and FTSE
Against the dollar, the pound fell in tandem with a sell-off in gold, driven by uncertainty over the UK’s fiscal outlook and the threat of inflation tariffs under the incoming Trump administration in the US.
A weaker pound means higher prices for those holidaying abroad, but it’s better news for British multinationals with dollar-denominated earnings. “For now, the weaker pound is a tailwind for the FTSE 100,” said Susannah Streeter, head of money and markets at Hargreaves Lansdown. “However, gains have slowed, with retailers such as M&S losing ground amid concerns about the UK’s economic outlook.”
Additional reporting by Ian Smith
