The march is the highest in UK government bond yields since the Labor government was launched budget plan debate in October raised widespread concern last week, as borrowing costs rose to surpass multi-decade highs.
The focus came on cuts to public spending or increases in other taxes last week, as 30-year-old gilt the result hit them the highest since 1998. Despite initially falling after Labour's election victory in July, 2-year-old gilt Yields have also climbed back above 4.5%, and the 10-year yield reached levels not seen since 2008.
The decline in investor confidence in the UK was particularly marked by a simultaneous fall in sterling, which on Friday hit its lowest level against the US dollar since November 2023.
Borrowing costs are also rising in the the euro area and the USand economists point out that the UK is under pressure from external factors including Donald Trump's return to the White House and the prospect of higher than expected interest rates this year.
But the increase in UK output is nevertheless a major headache for the UK government, which has promised resume economic growth and at the same time ensuring that debt will decrease as a proportion of the economy within five years. Public sector net debt in the UK at the moment it is almost 100% of GDP.
“The rise in gilt yields has a self-reinforcing feedback loop through UK debt consolidation, by raising borrowing costs used for budgetary purposes,” said ING's Chief European Rates Strategist Michiel Tukker in Friday's note.
Tukker cited analysis by the Independent Office for Budget Responsibility which suggests that the recent rise in output – if sustained – would wipe out the government's estimated headroom of £ 9.9 billion ($12.1 billion) to achieve it. self-imposed fiscal rules. These rules guarantee that Labor will cover the government's day-to-day spending with revenue, as well as aiming to move towards a decline in the UK's debt to GDP ratio over a longer period.
The Institute for Fiscal Studies think tank said on Friday there was a “knife edge” the UK would meet the previous fiscal rule, but Finance Minister Rachel Reeves “could be lucky”.
Otherwise it has an “unprecedented set of options,” said IFS Associate Director Ben Zaranko, including an impending takeover. changes to how debt is calculated to free up more space, reversing current spending plans and announcing more tax increases, which could be subject to changes in future years. The minister could also choose to do nothing and break her rule.
Economists Ruth Gregory and Hubert de Barochez at research group Capital Economics also said UK gilts could be stuck in a “vicious cycle,” in which “the rise in UK yields would put pressure on public finances , thus calling for even greater fiscal tightening. policy, but then putting additional pressure 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 announced further fiscal consolidation – measures to reduce public debt, general public spending cuts or tax increase – in the spring or earlier.
That could be achieved through spending cuts, they said, coming off the back of the £40 billion in tax increases which Labor announced in October.
A Treasury spokesman told CNBC: “This Government's commitment to fiscal rules and strong public finances is non-negotiable.”
“The Chancellor has already shown that tough decisions will be made in terms of spending, and the spending review is ongoing to find waste. people working.”
UK in a 'slow growth trap' – but not a mini-budget crisis
Former UK Chancellor of the Exchequer Vince Cable told CNBC on Friday that higher bond yields were seen in many countries and that it was not a “crisis situation” – but that markets had learned that Britain was involved. the “slow growth trap”.
“We have been there for many years, from the financial crisis, then Brexit, then the problem with Covid (-19) and war in Ukraine, and we are stuck with very high inflation, very slow growth, and so are the markets. points the UK down, relatively speaking.
Labor should have gone for a wider range of tax increases rather than focusing on an increase in National Insurance – a tax on wages – which has been criticized by the UK business communitysaid Cable. However, he said 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 downgraded comparisons with the UK micro budget crisis in 2022when Prime Minister Liz Truss's announcement of tax cuts increased volatility in the bond market.
“Truss's time as prime minister was just a reckless leap into the dark with a massive increase in the budget deficit on the assumption that this would somehow stimulate economic growth. Well, clearly not that's what happened this time. The argument is about whether they've tightened enough and whether they've done it the right way, but it's another problem,” said Cable. CNBC.
That sentiment was broadly reflected in a broader analysis. Bank of America strategists called comparisons to the small budget “overblown,” noting that the bar for the Bank of England to intervene in the gilt market, as it did at the time, was high .
Capital Economics said higher gilt yields last week were an economic result but not a crisis, with movements smaller and slower than after the small budget. David Brooks, head of policy at the consultancy Broadstone, said there did not appear to be any “systemic issues” involved in the liability-led investment (LDI) funds, which was the biggest concern in 2022.