UK government bond yields have risen since the Labor government announced its first budget in October last week, sparking widespread concern as borrowing costs rose to a new high in a decade.
Last week, the focus was on the prospect of either public spending cuts or further tax increases. 30 year gold coin Yields have reached their highest level since 1998. Despite an initial decline following Labor’s victory in the July election; 2 gold plated Yields also rose above 4.5%, with the 10-year Treasury yield reaching its highest level since 2008.
The decline in investor confidence in the UK was particularly highlighted by the simultaneous fall in the pound, hitting its lowest value against the US dollar on Friday since November 2023.
Borrowing costs are also rising in the eurozone and the United States, and economists say Britain is weighing down on external factors such as Donald Trump’s return to the White House and the prospect of much higher interest rates this year than previously expected. It is pointed out that
But rising UK yields are still causing a major headache for the UK government, which has pledged to restart economic growth while ensuring the share of debt in the economy declines within five years. UK public sector net debt currently stands at almost 100% of GDP.
“Rising gold yields create a self-reinforcing feedback loop for UK debt sustainability by increasing borrowing costs used in budgeting,” Michelle Tucker, senior European rates strategist at ING, said in a note on Friday. ”.
Mr Tucker cited an analysis by the Independent Office for Budget Responsibility showing that the recent rise in yields – if sustained – would eliminate the government’s estimated 9.9 billion pounds ($12.1 billion) of headroom to meet self-declared fiscal rules. did. These regulations require Labor to cover day-to-day government spending with revenue, and also set a goal of moving towards lowering the UK’s debt-to-GDP ratio over the longer term.
The Institute for Fiscal Studies think tank said on Friday Britain’s chances of achieving the old fiscal rules were on a “knife edge”, but Chancellor of the Exchequer Rachel Reeves could “get lucky”.
IFS associate director Ben Zaranko said she otherwise faces an “enviable set of choices”, including bringing forward upcoming changes to the way debt is calculated to increase headroom; He said conditions could include reducing current spending plans and announcing further tax increases. Change is likely to occur within the next few years. Ministers can also choose to do nothing and violate the rules.
Economists Ruth Gregory and Hubert de Baroches of the research group Capital Economics also said that UK government debt could be stuck in a “vicious cycle”, adding: “Rising UK yields are putting a strain on public finances. “This will require even more significant fiscal tightening.” However, the result will be an additional burden on the economy. ”
Pounds vs. Dollars.
Strategists at Bank of America Global Research said on Friday that Labor was unlikely to break the rules and would instead seek further fiscal consolidation measures – public debt reduction measures, generally public spending cuts and tax increases – in the spring or later. He said it would be announced earlier.
They added that this could be achieved through spending cuts on the back of a £40bn tax increase announced by Labor in October.
“The government’s commitment to fiscal rules and fiscal soundness is non-negotiable,” a Treasury spokesperson told CNBC.
“The Chancellor has already indicated that a spending review is underway to root out waste and that tough decisions will be taken on spending. “And over the coming weeks and months, he will continue to ensure that economic growth is achieved. , working people, who will leave no stone unturned in their determination to fight for society. ”
Britain is in a ‘low growth trap’, but it’s not a minor financial crisis
Former UK finance minister Vince Cable told CNBC on Friday that the rise in bond yields was seen in many countries and was not an “emergency panic situation”, but the market believed the UK was in a “low growth trap”. He said that he was aware that he was addicted to this.
“Since the financial crisis, Brexit, and the Covid-19 issue and the Ukraine war, we have been in that position for many years, stuck with relatively high inflation and very slow growth, so the market But this is not a panic situation, this is not an old-fashioned balance of payments crisis,” Cable said.
Mr Cable said Labor should have tackled broader tax increases, rather than focusing on raising National Insurance (tax on wages), which has been criticized by Britain’s business community. But he added that the market had broader concerns about UK growth and the state of the global economy, which is often clouded by external factors such as a weakening outlook for China.
Mr Cable also downplayed comparisons to Britain’s mini-budget crisis in 2022, when then-chancellor Liz Truss’ announcement of big tax cuts caused big swings in bond markets.
“The truss moment was when the chancellor just jumped recklessly into the dark, assuming that a huge increase in the budget deficit would somehow cause economic growth. Well, clearly that’s what happened this time. The argument is: “Did you tighten it enough? Did you tighten it the right way?” Cable told CNBC.
That sentiment was widely reflected in the broader analysis. Bank of America strategists called the comparison to a mini-budget “overblown” and said the bar for the Bank of England to intervene in the gold market as it did at the time was high.
Capital Economics said last week’s rise in gold yields was a headwind for the economy but not a crisis, with smaller and slower movements compared to the post-mini-Budget period. David Brooks, head of policy at consultancy Broadstone, said there was no “systemic problem” with debt-driven investment (LDI) funds, which was the biggest concern in 2022.
