A view of the Royal Exchange and the City of London as the glass architecture of the 22 Bishopsgate tower disappears into the fog on November 6, 2024 in London, United Kingdom.
Mike Kemp | In the photos | Getty Images
Borrowing costs in the UK rose on Tuesday after an auction of 30-year government bonds pushed long-term bond yields to their highest level in almost three decades.
By 2:02 p.m. London time, the yield on the 30-year Gilt, a British government bond, rose 3 basis points to 5.212%, the highest level since the late 1990s.
The move comes after a decision by the UK Debt Management Authority auctioned off Gilt worth 2.25 billion pounds ($2.83 billion) with a 30-year maturity and an initial yield of 4.375%.
The yield on 20-year bonds increased by 3 basis points and reached 5.153%.
Yields on shorter-dated bonds also rose on Tuesday.
The UK 10-year Treasury yield rose 3 basis points to 4.641%, while 2- and 5-year Treasury yields were slightly higher in early afternoon.
Concerns about “stagflation”.
Susannah Streeter, director of money and markets at Hargreaves Lansdown, said on Tuesday that the UK bond market was being affected by uncertainty both at home and abroad.
Traders are cautious, she told CNBC in emailed comments, that U.S. President-elect Donald Trump's tariff plan could prove inflationary in America and beyond if upward pressure is placed on the dollar or U.S. interest rates and consumer prices rise.
The UK is facing its own wave of problems relating to the British economy unexpectedly shrank by 0.1% in October. After this, inflation also hovers above the Bank of England's target of 2%. edges higher to 2.6% in November.
On the political front, concerns remain about the Labor government's fiscal policy and fiscal plans raise taxes by £40 billion ($50.1 billion) through a series of new and controversial policies. These include the increase in employers' national insurance contributions – tax on earnings – which has resulted warnings from enterprises that they will be less willing to hire new employees.
On Monday, the British Chambers of Commerce said business confidence had fallen to its lowest level since then. UK 'mini-budget' crisis in 2022with many companies citing concerns about covering additional tax costs in addition to rising salaries.
“In the UK, deepening stagflation is of particular concern given that inflation is rising and wage growth remains high while the economy stagnates,” Streeter told CNBC on Tuesday. “Appetite for purchasing long-term UK public debt appears to have declined in the face of this uncertainty.”
“Treasury bond yields have risen sharply in recent weeks, which is bad news for the government because it raises concerns about the state of public finances,” Richard Carter, head of fixed-rate instruments at Quilter Cheviot, said in a note to clients on Tuesday.
“The Bank of England remains cautious about cutting interest rates too aggressively, and lukewarm demand from investors during the recent gold sale highlights market uncertainty.”
He added that the yield on government bonds, however, represents an “attractive opportunity for long-term investors” because it is much higher than the expected level of inflation.
“For investors with a lower risk appetite, short-term bonds still represent a promising avenue and are less sensitive to market fluctuations,” he said.