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View towards the Royal Exchange and the City of London, where the glass architecture of 22 Bishopsgate tower disappears into the fog on November 6, 2024 in London, United Kingdom.
Mike Kemp | In images | fake images
UK borrowing costs rose on Tuesday after an auction of 30-year Treasury bonds pushed long-term bond yields to their highest level in almost three decades.
At 2:02 pm London time, the yield on the 30-year Gilt (a UK government bond) rose 3 basis points to 5.212%, its highest level since the late 1990s.
The move came after the UK Debt Management Office auctioned £2.25 billion ($2.83 billion) in Gilts maturing in 30 years, with an initial yield on offer of 4.375%.
The 20-year bond yield added 3 basis points to trade at 5.153%.
Yields on government bonds with shorter maturities also rose on Tuesday.
UK 10-year bond yields gained 3 basis points to trade at 4.641%, while 2-year and 5-year bond yields rose slightly in the early afternoon.
Concerns about ‘stagflation’
Susannah Streeter, head of money and markets at Hargreaves Lansdown, said on Tuesday the British bond market had been hit by uncertainty both internally and externally.
Traders were wary, he told CNBC via emailed comments, that US President-elect Donald Trump’s tariff plan could prove inflationary in the US and beyond if upward pressure is put on the dollar or US interest rates and consumer prices rise.
The UK faces its own set of problems, and the British economy unexpectedly contracting by 0.1% in October. Inflation also remains above the Bank of England’s 2% target, after edging higher to 2.6% in November.
On the political front, concerns persist over the Labor government’s fiscal policies and its plans to increase taxes by £40 billion ($50.1 billion) through a series of new and controversial policies. These include an increase in employer payments to National Insurance (a tax on profits) which has caused warnings of the companies that will be least likely to hire new workers.
On Monday, the British Chambers of Commerce said business confidence had fallen to its lowest level since The UK’s ‘mini-budget’ crisis in 2022and many companies express concerns about covering additional tax costs in addition to the increase in salaries.
“In the UK, there is particular concern brewing about stagflation taking hold, given that inflation has been rising and wage growth is still strong, while the economy has stagnated,” Streeter told CNBC on Tuesday. “It seems that appetite for buying long-term British government debt has fallen amid this uncertainty.”
“Bond yields have risen sharply in recent weeks, which is bad news for the government as it stokes fears about the state of the public finances,” said Richard Carter, head of fixed interest at Quilter Cheviot. in a note to clients on Tuesday.
“The Bank of England remains cautious about cutting interest rates too aggressively, and tepid investor demand in the latest bond sale underlines the uncertainty in the market.”
He added that, however, gold yields presented an “attractive opportunity for long-term investors” as they were well above expected inflation levels.
“For investors with a lower risk appetite, short-term bonds still offer a promising avenue and are less sensitive to market fluctuations,” he said.
