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UK 10-year borrowing costs rose to their highest level since the global financial crisis and sterling sank on Wednesday as rising bond sales threatened the Labor government's ability to meet its budget commitments.
10 years gilt the yield increased by 0.13 percentage points to 4.82 percent – its highest level since 2008. Yields move inversely with prices.
Borrowing costs in the UK have risen more rapidly in the UK so far in 2025 than in other major economies, as investors worry about the government's borrowing needs and the growing threat of inflation in the economy.
“It's a global market, but compounded in the UK by the toxic combination of a flat economy, sticky inflation and a stretched financial landscape,” said Andrew Pease, chief investment strategist at Russell Investments.
The yield on the 30-year gilt – which on Tuesday rose to its highest level since 1998 – also continued to rise, touching 5.38 percent.
Sterling was down 1.1 percent against the dollar in the afternoon to $1.234, its weakest level since April. In the stock market, the domestically concentrated FTSE 250 index fell by 2 percent.
Chancellor Rachel Reeves has left herself £9.9bn less headroom against her revised financial rules in the Budget even after she announced a £40bn tax hike aimed at “wiping the slate clean” on public finances.
Since then, rising government debt yields have put that budget leeway at risk. The level of bond yields is an important determinant of the house budget given its impact on the government's interest bill, which is more than £100bn a year.
Wednesday's fresh rise in prices means the chancellor's headroom against the current budget bill is now over, according to Ruth Gregory at Capital Economics.
If high yields are maintained, it may force the chancellor to announce corrective action to keep budget policy on track. March 26, i Office of Budget Responsibility announces a new set of financial forecasts that will contribute to bond yield movements.
“The chancellor has no room left against his monetary policy given the rise in yields, and the market is asking what the next step is from here,” said Ben Nicholl, senior fund manager at Royal London Asset Management. “Raising taxes or cutting government spending will put additional pressure on growth, which puts pressure on tax revenue when borrowing is already high.”
The chancellor has promised to make significant tax changes only once a year, in one “fiscal event”. The next of these is not expected until the fall. As such, any corrective action in March is likely to come in the form of spending cuts, officials pointed out.
A Downing Street spokesman said: “We are committed to delivering the biggest budget surplus for 20 years. I will not comment on specific market movements. . . but when it comes to our approach to the economy we will always prioritize economic stability and sound public finances.”
Restoring headroom to its October levels through stricter spending plans would mean reducing real-world growth in the department's daily spending from 1.3 percent annually to less than 1 percent, said Ben Zaranko, an economist at the Fiscal Studies think tank.
The government is expected to announce the results of a multi-year, departmental spending review around June.
“We are in a dangerous place” when it comes to the chancellor's budget, Zaranko said. “Maturity and passion have gone the wrong way for him.”
Adding to the problems facing the government are poor GDP figures, which will also play into the OBR's forecast.
The watchdog is likely to cut growth forecasts to 2 percent in 2025 due to weak recent data, economists have predicted. The impact on the head of the budget will, however, depend on whether the OBR determines whether the output losses are permanent or can be made later in parliament.
“The upcoming Spring Statement, Expenditure Review, and Autumn Budget will be a painful follow-up to the chancellor's inaugural budget,” said Sanjay Raja, chief economist at Deutsche Bank.
The latest market slump comes after weeks of rising yields on old US Treasuries and German Bunds, although Wednesday's sell-off was particularly negative in the UK.
Analysts say the simultaneous sell-off in gilts and the pound – which usually benefit from higher yields – carries echoes of the market collapse in Liz Truss' negative 2022 budget.
“What's happening in the gilt market has undermined confidence in the pound a little bit,” said Chris Turner, head of financial markets at ING, adding that some investors were abandoning recent bets that the pound would strengthen more against other major currencies. a dollar.
“FX traders are looking at the gilts market and are worried that something similar is happening in 2022,” Turner said.
Additional reporting by Jim Pickard