Governments around the world are uncomfortable with rising borrowing costs that follow the U.S. debt market. But even amidst the global bond crash, the UK stands out.
British government bonds (known as gilts) have suffered a particularly tough sell-off as investors balk at the country's weak economic growth, stubborn inflation and high debt levels. The yield on the benchmark 10-year Treasury note reached 4.9% on Tuesday, the highest level since 2008, while the yield on the 30-year Treasury note was the highest since 1998.
Rising borrowing costs have put the British government's plan to revive economic growth by allocating more money to public services and boosting investment in jeopardy less than three months after it was announced.
“With yields rising everywhere, global investors are looking at the UK as the weakest link in the chain,” said Hugh Gimbar, a strategist at JPMorgan Asset Management. .
And it's not just the bond. Sterling is at its lowest level against the dollar in more than a year and has performed worse than other major currencies over the past month, with stocks falling in London.
Yields on government bonds and other countries' bonds are on the rise. Since the U.S. presidential election, borrowing costs have risen as fiscally disciplined investors expect President-elect Donald J. Trump to enact policies that will lead to higher inflation, while a series of strong labor markets have pushed up borrowing costs. The report also dampens expectations for a rate cut. By the Federal Reserve System.
Although the UK government is not directly responsible for the rise in borrowing costs, it will have an impact on economic planning.
In late October, Chancellor of the Exchequer Rachel Reeves stood in Parliament to introduce Labor's first budget in 14 years. He has announced an increase in public spending by 70 billion pounds ($85 billion) a year over the next five years, with about half to be financed through increased taxes and the other half through debt. He also said he would stick to strict fiscal rules to reduce debt levels.
This move is a gamble, a decision to spend large sums of public money in the short term in the hope that it will lead to further economic growth that will stimulate investment, improve the country's debt burden, and avoid another major tax increase. It was thought that there was.
But this plan was put to the test sooner than expected. Rising bond yields have increased the burden of debt servicing, removing the buffer under Reeves' fiscal rules.
“We have clear fiscal rules and we are going to stick to them,” Chancellor Keir Starmer said on Monday.
If the situation continues until March, when the Office for Budget Responsibility, an independent watchdog, releases its semiannual economic forecast, Reeves will have to decide whether to raise taxes further or cut spending to stay within the rules. Probably.
JPMorgan Asset Management's Gimbar said the government has ruled out another tax hike, and because it is difficult to cut spending in an already maxed-out government sector, “the government has some difficult challenges ahead. We are left with a choice.” “Global investors will therefore be looking at the mix of growth and inflation and demanding further compensation from UK government bonds,” he said.
The demands of global investors are particularly relevant for the UK, where around a third of the country's debt is owned by foreign investors.
The impact of the bond market turmoil is still fresh in Britons' minds. In late 2022, then-Chancellor Liz Truss's government announced an aggressive plan to cut taxes and increase borrowing, sidelining the fiscal watchdog in the process. Bond yields soared, the pound plummeted, central banks had to intervene to stabilize markets, and within weeks Truss was ousted. Fears of a recurrence persist, with Labor insisting it will govern with iron financial discipline.
“This is very different from the 2022 market scenario,” Gimbar said. “That was at a time when gold yields were actually pushing up global bond yields. This time, gold yields are caught up in the movement of global bond yields.”
Still, there are few signs of easing. Inflation is expected to remain at 2.6%, well above the Bank of England's 2% target, according to data published on Wednesday. Traders expect the central bank to cut rates only once this year.
This will continue to put pressure on the government to respond with a fiscal plan that calms markets without abandoning its economic strategy.
Benjamin Caswell, an economist at the National Institute of Economic and Social Research, said the budget changes would look “politically weak.” These policies are still new and many won't come into force until April, so there needs to be time to work through the economy, he added.
“It depends on whether they have the political capital and the will to get through it,” he said.
