UK bond market sell-off deepens and pound falls

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UK 10-year borrowing costs rose further on Thursday as a bond market sell-off deepened, hitting the pound and threatening to derail the Labor government’s fiscal plans.

10 years Gilt The yield rose 0.12 percentage points to 4.93 percent in early trade, the highest level since 2008, before returning to 4.82 percent.

The pound rose again amid a sell-off, falling 0.6 percent against the dollar to $1.229, its weakest since November 2023.

UK borrowing costs have risen sharply as investors worry about the government’s heavy borrowing needs and the growing threat of stagnant inflation, which combines weak growth with persistent price pressures.

“The economy is heading towards stagnation,” said Mark Dowding, chief investment officer at RBC Bluebay Asset Management.

Sterling Also hurt by the resurgent dollar as a string of recent U.S. data boosted investor confidence in the world’s largest economy.

“This sale is off [the pound] And gilts reflect the deterioration of UK financial prospects,” said analysts at Brown Brothers Harriman.

The dollar index, which measures the currency against a basket of six others, rose 0.1 percent on Thursday.

Even after Chancellor Rachel Reeves announced a thin £40bn tax-increase package with £9.9bn of headroom against her revised revenue rules in the Budget which aims to “clean the slate” on public finances.

That budgetary wiggle room is under threat as government debt yields rise. The level of bond yields is an important determinant of budget headroom due to its implications for the government’s interest bill, which exceeds £100bn a year.

The gilts market could suffer another bout of selling on Friday, analysts said, if closely watched U.S. jobs data push yields higher on U.S. Treasuries, dragging gilts down with them.

“If we see a strong payday, it could be very fatal for gilts,” said Pooja Kumra, UK rate strategist at TD Securities.

Analysts said the simultaneous sell-off of the gilt and the pound echoed the reaction caused by the “mini” budget for the Ledge Truss in 2022.

But many investors think the situation is less dire than the gilts crisis of three years ago.

“I hope that things will start from the bottom. . . The washout in gilts already happened last year,” said Geoffrey Yu, a senior strategist at BNY. “I’m not denying that there are problems in the UK, but suddenly compared to 2022, I think it’s pushing things.”