UK government debt sales are accelerating as borrowing costs hit a post-2008 high
Britain’s average borrowing costs rose to their highest level since the financial crisis, as investors pulled out of government debt amid fears of inflation.
The UK’s 10-year yield – closely watched as a measure of future interest payments on public debt – hit 4.82 percent on Wednesday, surpassing the peak seen after Liz Truss’s modest 2022 budget.
The 30-year yield, which began amid that market turmoil two and a half years ago, rose to 5.358 percent on Tuesday — a new 27-year high. Bond yields are rising as rates fall, underscoring the magnitude of this recent selloff.
The pound weakened again, falling 1 percent against the dollar to $1.23 and underperforming its peers – a sign that markets remain skeptical about the UK’s financial stability.
Investors’ enthusiasm for the dollar continued to increase more than expected on corporate tax cuts and regulatory rollbacks under the new US administration. The dollar index, which tracks the greenback against six other major currencies, rose 0.46 percent on Wednesday and is up nearly 7 percent over the past year. Oil prices fell by more than 1 percent, easing the inflation trend.
Analysts say a number of factors have made the UK more vulnerable to a rise in gilt yields. Britain’s reliance on energy imports has fueled asset price shocks, while traders – seeing attractive returns on investment-grade private debt – are seeking higher payouts on UK government bonds. More borrowing revealed in October’s budget, combined with the Bank of England’s gradual interest rate cuts this year, also weighed on prices.
Simon French, chief economist at Panmure Liberum and a columnist for The Times, noted that “the reduction in long-term UK bond yields to their international benchmark – long-term US bonds – takes place in 2022. [after the mini-budget] and it never really came back.”
The toxic combination of weakening good and rising yields was last seen during the collapse of Liz Truss’s mini-budget, when markets increasingly doubted Britain’s financial stability.
The recent rise in borrowing costs directly affects government finances by increasing the cost of debt servicing, eroding the chancellor’s budget. A report by Capital Economics estimates that £8.9 billion of Rachel Reeves’ £9.9 billion budget has been spent, raising the possibility of further tax rises or cuts in public spending.
Unless gilt yields fall in March, when the Office for the Budget (OBR) revises its forecasts, Reeves could be forced to return the Whitehall budget to balance the government’s books. A spokesman for the Treasury also pointed out that the convergence of fiscal rules is “non-negotiable,” although the chancellor promised no tax changes in his spring statement on 26 March. That leaves amortization as the most likely option if borrowing costs remain high.
Jim Reid, an analyst at Deutsche Bank, said the government may go ahead with tax increases if yields remain high, while acknowledging the moves would face political opposition.
Reeves has already penciled in a 4.3 per cent increase in department costs this year and 2.6 per cent in 2025-26. In addition, the budget is expected to increase by only 1.3 percent. Any changes in the budget could change the upcoming spending review in June.
A Treasury spokesman said it would not “reveal” the OBR’s figures, but stressed that “no one should be in any doubt about the chancellor’s commitment to economic sustainability and sound public finances.”
Gilts were the worst-performing asset class this week, echoing global bond market jitters in the US, Germany, and France. Yields rose late on Tuesday following data pointing to continued inflationary pressures in the US, pushing the 10-year Treasury yield to levels not seen since April 2024. Benjamin Schroeder, senior rates strategist at ING, noted that “sentiments in The US has a strong gilts market.”
The pound suffered as investors gravitated towards the dollar, which has benefited from uncertainty about Donald Trump’s trade policy, including provocations over the Panama Canal and Greenland. Markets now expect fewer rate cuts from the Federal Reserve and the Bank of England alike, a trend that tends to boost currencies. However, sterling failed to follow suit, reflecting the severity of the UK’s fiscal and inflationary challenges.
Kenneth Broux, a currency strategist at Société Générale, warned that market conditions are “preparing for bond convergence,” with ever-increasing policies and unpredictable policies as 2025 unfolds. The concern in Whitehall is that such chaos could continue, putting British public finances – and the chancellor’s political position – in an increasingly critical position.
