UK treasury bond yields have marched upward since the formation of the Labor government debut budget plan in October sparked widespread concern last week as borrowing costs rose beyond multi-year highs.
Last week there was the prospect of public spending cuts or further tax increases, as 30-year-old gold plating profitability has reached its level highest level since 1998. Despite an initial decline following Labor's election victory in July, 2 years old, gold plated the yield also rose above 4.5%, while the 10-year bond yield reached levels not seen since 2008.
The decline in investor confidence in the UK has been particularly highlighted by the concurrent decline in the pound sterling, which on Friday hit its lowest level against the US dollar since November 2023.
The costs of mortgage loans are also rising euro zone and USand economists point out that the UK is being influenced by external factors, including Donald Trump's return to the White House and expectations of much higher interest rates this year than previously expected.
Nevertheless, the sharp rise in yields in the UK poses a serious problem for the British government, which has committed to doing so restart economic growth while ensuring that debt as a share of the economy declines within five years. British public sector net debt it currently amounts to almost 100% of GDP.
“The rise in government bond yields is creating a self-reinforcing feedback loop on UK debt sustainability, increasing borrowing costs used for budgetary purposes,” Michiel Tukker, senior adviser for ING European pricing strategy, said in a note on Friday.
Tukker cited analysis by the independent Office for Budget Responsibility that shows the recent rise in yields – if it continues – would deprive the government of estimated reserves of £9.9 billion ($12.1 billion) to meet its requirements self-declared fiscal rules. The legislation obliges Labor to cover day-to-day government spending with revenue, and is also aimed at pushing the UK's debt-to-GDP ratio to fall in the long term.
An Institute of Fiscal Studies think tank said on Friday there is a “knife-edge” chance of the UK achieving the previous fiscal rule, but Finance Minister Rachel Reeves may be “lucky”.
Otherwise, it faces an “unenviable set of options,” said IFS deputy director Ben Zaranko, including an announcement of upcoming events changes in the method of calculating debt free up more freedom by limiting current spending plans and announcing further tax increases, which could be contingent on changes in the coming years. The minister could also do nothing and break her rules.
Economists Ruth Gregory and Hubert de Barochez of the Capital Economics research group also said British gilts could be trapped in a “vicious circle” in which “rising yields in the UK are straining public finances, calling for even more fiscal tightening.” policy, but in turn creates an additional burden on the economy.”
Pound versus dollar.
Bank of America Global Research strategists said Friday that Labor is unlikely to break its rules and instead announce further fiscal consolidation — measures aimed at reducing the national debt, generally cutting public spending or raising taxes — in the spring or earlier.
This could potentially be achieved through spending cuts, they added, coming out of the budget Tax rises worth £40 billion announced by the Labor Party in October.
A Treasury spokesman told CNBC: “This government's commitment to fiscal principles and sound public finances is non-negotiable.”
“The Chancellor has already shown that difficult spending decisions will be made and a spending review to root out waste will be underway. Over the coming weeks and months, the Chancellor will leave no stone unturned in his determination to deliver economic growth and fight for working people.”
Britain in a 'slow growth trap' but not in a mini budget crisis
Former UK Finance Minister Vince Cable told CNBC on Friday that many countries are seeing higher bond yields and it does not represent an “emergency panic situation” but that markets have realized that the UK is stuck in a “slow growth trap.”
“We have been there for many years, since the financial crisis, then Brexit, then the Covid problem and the war in Ukraine, and we are stuck with relatively high inflation, very slow growth, which means that markets are relatively speaking, which means that the UK is weakening , but this is not a panic situation or a crisis resulting from an old-style balance of payments sell-off,” Cable said.
Labor should have opted for a wider range of tax increases, rather than focusing on the increase in National Insurance contributions – payroll tax – which has been sharply criticized by the British business communityCable said. But he added that the market has broader concerns about UK economic growth and the global economic picture, which is clouded by external factors such as China's weaker prospects.
Cable also downplayed comparisons with UK mini budget crisis in 2022when then-Prime Minister Liz Truss's announcement of sweeping tax cuts sparked huge volatility in the bond market.
“In the Truss moment, the Prime Minister simply recklessly jumped into the dark, significantly increasing the budget deficit on the assumption that this would somehow stimulate economic growth. Well, that apparently didn't happen this time. The dispute is whether they tightened the policy enough and whether they did it the right way, but that's a different kind of problem,” Cable told CNBC.
This sentiment was widely reflected in the broader analysis. Bank of America strategists called comparisons to the mini-budget “overblown,” noting that the bar for the Bank of England to intervene in the government bond market as it did at the time was high.
Capital Economics said higher Treasury yields last week were an economic drag but not a crisis, as moves were smaller and slower than after the mini-budget. David Brooks, head of policy at consultancy Broadstone, said there did not appear to be “any systemic problems” in the EU. liability-based investment funds (LDIs) that were the most feared in 2022.