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The highest rise in UK government bond yields since the launch of the Labor government the budget plan debut in October sparked widespread concern last week as borrowing costs rose to multiple multi-decade highs.
The prospect of public spending cuts or further tax increases has been in focus as 30 golden years the returns are hit the highest level since 1998. Despite initially falling after Labour’s election victory in July, 2 golden years yields also returned above 4.5%, while the 10-year yield reached levels not seen since 2008.
The decline in investor confidence in the UK was particularly highlighted by a simultaneous fall in the pound, which on Friday hit its lowest level against the US dollar since November 2023.
Borrowing costs are also rising in the euro zone and the USand economists indicate that and the United Kingdom is weighed down by external factors, including the return of Donald Trump to the White House and expectations for interest rates largely higher than expected this year.
But the rise in UK yields is also a big headache for the British government, which has promised to restart economic growth while ensuring the debt declines as a share of the economy in five years. UK public sector net debt currently it is almost 100% of GDP.
“Rising gilt yields has a self-reinforcing feedback loop through UK debt sustainability, raising borrowing costs used for budget purposes,” said Michiel Tukker, ING’s Senior European Strategist in a Friday note.
Tukker cited analysis by the independent Office for Budget Responsibility which indicated that the recent rise in yields – if sustained – would wipe out the government’s estimated £9.9 billion ($12.1 billion) billion) to meet their results. self-declared tax rules. In addition to the goal of moving towards a decline in the UK’s debt to GDP ratio over a longer period of time, these rules commit Labor to cover everyday government spending with revenue.
The Institute of Fiscal Studies think tank said on Friday that there is a “knife edge”, the possibility of the United Kingdom to get the latest tax rule, but that the Finance Minister Rachel Reeves could “get lucky “.
It otherwise faces an “unenviable set of options”, said IFS associate director Ben Zaranko, including presenting the upcoming changes in how the debt is calculated to free up more headroom; cancel current spending plans; announcing more tax increases, which could be subject to changes in the coming years; or do nothing and break their rule.
Economists Ruth Gregory and Hubert de Barochez of research group Capital Economics also said that British gilts may be trapped in a “vicious circle”, in which “rising UK yields put a strain on public finances, which is why they are asking for an even greater strengthening of the policy, but in turn putting an additional strain on the economy.”
Pound vs dollar.
Bank of America Global Research strategists said on Friday that Labor was unlikely to break its rules, and instead announce further fiscal consolidation – measures to reduce public debt, generally public spending cuts or increases of the tax – in the spring or before.
That could be because of spending cuts, they added, coming from behind £40 billion in tax increases which Labor announced in October.
A Treasury spokesman told CNBC: “This Government’s commitment to fiscal rules and sound public finances is non-negotiable.”
“The Chancellor has already shown that tough decisions on spending will be taken, with the spending review to root out waste underway. And in the coming weeks and months, the Chancellor will leave no stone unturned in her determination to bring economic growth and the fight for working people”.
UK in a ‘slow growth trap’ – but not a mini-budget crisis
Former UK Finance Minister Vince Cable told CNBC on Friday that higher bond yields were seen in many countries and were not an “emergency panic situation” – but that the markets had realized that Britain was stuck in a “slow growth trap”.
“We have been for many years, since the Financial Crisis, after Brexit, after a problem with Covid and the Ukraine war, and we are stuck with relatively high inflation, very slow growth, and so the markets mark the United Kingdom. , relatively speaking, but it is not a situation of panic, it is not a crisis of the sale of the old style of payment, “said Cable.
Labor should have gone for a wider range of tax increases instead of focusing on an increase in National Insurance which has been slammed by the British business communityCable said. However, he added that the market has wider concerns about UK growth and the global economic picture, which is clouded by external factors such as the weaker Chinese outlook.
Cable also downplayed comparisons with the Mini-budget crisis in the UK in 2022when Prime Minister Liz Truss’s announcement of sweeping tax cuts triggered massive volatility in the bond market.
“Truss’s moment was a prime minister alone who took a reckless leap in the dark with a large increase in the budget deficit on the assumption that this would somehow cause economic growth. Well, this is clearly not what happened this time. The argument is about whether they did it tight enough and whether they did it the right way, but that’s a different issue,” Cable told CNBC.
That sentiment was largely reflected in a broader analysis. Bank of America strategists called comparisons with the mini-budget “overblown”, noting that the bar for the Bank of England to intervene in the gilt market, as at that time, was high.
Capital Economics said that last week’s higher yields were an economic wind, but not a crisis, with smaller and slower movements than after the mini-budget; while David Brooks, head of policy at consultancy Broadstone, said there do not appear to be “systemic issues at play” Liability-driven investment funds (LDI) that were the biggest concern in 2022.
