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The rise in UK government bond yields since the launch of the Labor government’s plan debut budget plan in october sparked widespread concern last week, when borrowing costs rose to several decade-highs.
The prospect of public spending cuts or further tax increases became clear as 30 year old gold yields reached their highest level since 1998. Despite initially falling after the Labor Party’s election victory in July, 2 year old golden Yields have also risen back above 4.5%, while the 10-year yield reached levels not seen since 2008.
The decline in investor confidence in the UK was especially highlighted by a simultaneous fall in sterling, which on Friday hit its lowest level against the US dollar since November 2023.
Borrowing costs are also rising in the euro zone and the USand economists point out that the UK is being hit by external factors, including Donald Trump’s return to the White House and expectations of broadly higher-than-expected interest rates this year.
But rising UK yields remain a major headache for the British government, which has pledged to restart economic growth and at the same time ensure that debt decreases as a proportion of the economy in five years. UK public sector net debt It currently represents almost 100% of the GDP.
“Rising bond yields have a self-reinforcing feedback loop through UK debt sustainability, by increasing borrowing costs used for budgeting purposes,” said senior rates strategist ING’s European directors, Michiel Tukker, in a note on Friday.
Tukker cited analysis by the independent Office for Budget Responsibility indicating that the recent rise in yields (if sustained) would wipe out the government’s estimated £9.9 billion ($12.1 billion) room to meet its self-declared tax rules. In addition to the goal of moving towards a decline in the UK’s debt-to-GDP ratio over the longer term, those rules commit Labor to covering day-to-day public spending with revenue.
The Institute for Fiscal Studies think tank said on Friday there is a “knife line” over the chance of the UK achieving this latest fiscal rule, but that Finance Minister Rachel Reeves could “get lucky”.
Otherwise, it faces an “unenviable set of options,” said IFS associate director Ben Zaranko, including introducing the next changes to the way debt is calculated free up more free space; cut current spending plans; announce more tax increases, which could be conditional on changes in the coming years; or do nothing and break your rule.
Economists Ruth Gregory and Hubert de Barochez at research group Capital Economics also said British bonds could be trapped in a “vicious cycle”, in which “rising UK yields put pressure on public finances, for example.” which require an even greater adjustment of fiscal policies. political, but at the same time it generates additional pressure on the economy.
Pound against dollar.
Strategists at Bank of America Global Research said on Friday that Labor was unlikely to break its rules and instead announce further fiscal consolidation (measures to reduce public debt, usually public spending cuts or tax increases). in the spring or earlier.
This would potentially be achieved through spending cuts, they added, as a result of the £40 billion in tax increases which the Labor Party announced in October.
A Treasury spokesperson told CNBC: “This government’s commitment to fiscal rules and sound public finances is non-negotiable.”
“The Chancellor has already demonstrated that difficult decisions will be made on spending, and that a spending review is underway to root out waste. And over the coming weeks and months, the Chancellor will leave no stone unturned in her determination to generate economic growth and fight for working people.”
The UK is in a ‘slow growth trap’, but not a mini budget crisis
Former UK Chancellor of the Exchequer Vince Cable told CNBC on Friday that higher bond yields were being seen in many countries and that it was not an “emergency panic situation” but that markets had realized that Britain was caught in a “slow growth trap”.
“We have been there for many years, since the financial crisis, then Brexit, then a problem with Covid and the Ukraine war, and we are stuck with relatively high inflation, very slow growth, so the markets are devaluing to the United Kingdom, relatively speaking. But this is not a panic situation, it is not a crisis of the old balance of payments situation,” Cable said.
Labor should have opted for a broader range of tax increases rather than focusing on an increase in National Insurance that has been criticized by the UK business communityCable said. However, he added that the market has broader concerns about UK growth and the global economic outlook, which is clouded by external factors such as China’s weaker outlook.
Cable also downplayed comparisons with the UK mini-budget crisis in 2022when then-Prime Minister Liz Truss’s announcement of sweeping tax cuts triggered huge volatility in the bond market.
“The Truss moment was a prime minister who simply took a reckless leap into darkness with a huge increase in the budget deficit under the assumption that this would somehow trigger economic growth. Well, that’s clearly not what happened this time “The argument is about whether they’ve made enough adjustments and whether they’ve done it the right way, but it’s a different kind of problem,” Cable told CNBC.
That sentiment was largely reflected in broader analysis. Bank of America strategists called comparisons to the mini-budget “exaggerated,” noting that the bar for the Bank of England to intervene in the bond market, as it did at the time, was high.
Capital Economics said last week’s higher bond yields were an economic headwind but not a crisis, with moves smaller and slower than after the mini-budget; while David Brooks, head of policy at consultancy Broadstone, said there did not appear to be any “systemic issues at play” in the Liability-driven investment funds (LDI), which were the biggest concern in 2022.
