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Pressure rises on Reeves as government borrowing costs hit 27-year high Pressure rises on Reeves as government borrowing costs hit 27-year high
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Chancellor will face more limited fiscal headroom at budget after yield on 30-year bond increases to 5.68% Chancellor will face more limited fiscal headroom at budget after yield on 30-year bond increases to 5.723%
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Britain’s long-term borrowing costs have hit their highest level in 27 years, intensifying the pressure on the chancellor, Rachel Reeves, before the autumn budget.Britain’s long-term borrowing costs have hit their highest level in 27 years, intensifying the pressure on the chancellor, Rachel Reeves, before the autumn budget.
The yield, or interest rate, on 30-year UK government debt hit 5.721% on Tuesday. That is its highest level since 1998, indicating that it will cost the UK more to borrow from the markets, above the previous 27-year high of 5.649% set in April. The yield, or interest rate, on 30-year UK government debt hit 5.723% on Tuesday. That is its highest level since 1998, indicating that it will cost the UK more to borrow from the markets, above the previous 27-year high of 5.649% set in April.
Yields, which rise when a bond’s price falls, are a measure of the interest rate that investors demand when lending to a government or company.Yields, which rise when a bond’s price falls, are a measure of the interest rate that investors demand when lending to a government or company.
The UK 30-year bond yield has been rising steadily over the last year, amid a wider global sell-off in long-term government bonds. Analysts have blamed that sell-off on rising inflationary expectations – meaning lenders seek a higher rate of return. The UK 30-year bond yield has been rising steadily over the last year, amid a wider global sell-off in long-term government bonds, which gathered pace on Tuesday. Analysts have blamed that sell-off on rising inflationary expectations – meaning lenders seek a higher rate of return.
While bond prices fell on Tuesday, traders piled in to precious metals in a flight to safety. This pushed the gold price up to a new record high of $3,508 (£2,607) an ounce on Tuesday, while silver rose over $40 an ounce for the first time since 2011. The pound also weakened on Tuesday, falling by 1.8 cents against the US dollar to $1.3365, on track for its worst day since early April, when Donald Trump launched his global trade war.
Anxiety over fiscal sustainability is another factor, with Donald Trump’s recent tax cuts and spending bill expected to add trillions of dollars to the US national debt. Economists are also concerned that Reeves may announce tax rises in the autumn budget; the City consultancy Capital Economics has predicted the chancellor may have to raise £18-28bn in the autumn budget, mostly via higher taxes, to meet her fiscal rule with a buffer of £9.9bn.
In the UK, opposition to proposed welfare cuts have highlighted the challenge in cutting government spending. Rising borrowing costs are a blow to the UK chancellor, as they eat into the limited fiscal headroom available to the Treasury. This may force Reeves to consider tax rises, or spending cuts, to ensure she still hits her fiscal rule to have debt falling in five years’ time.
Rising borrowing costs are a blow to the UK chancellor, as they eat into the limited fiscal headroom available to the Treasury. It may force Reeves to consider tax rises, or spending cuts, to ensure she still hits her fiscal rule to have debt falling in five years’ time. In the UK, opposition to proposed welfare cuts has highlighted the challenge in cutting government spending.
“Gilt yields have risen again in recent days, reflecting concerns that further tax increases from already high levels could damage growth, add to inflation, and still leave a sizeable hole in the public finances. Markets appear less focused on Treasury rhetoric and more on whether the government can present a credible plan to control spending,” said Mark Dowding, the BlueBay chief investment officer at RBC BlueBay Asset Management.
“The central issue is the perception that welfare expenditure remains on an unsustainable path. Without action in this area, confidence risks eroding further.”
“While rumours around tax policy add to the noise, the underlying challenge is structural and relates to whether the UK can avoid slipping into a worsening fiscal position,” Dowding added.
The rise in borrowing costs came as the City digested Keir Starmer’s decision to reshuffle his Downing Street organisation on Monday, including putting Darren Jones, the chief secretary to the Treasury, in charge of day-to-day delivery of the prime minister’s priorities.The rise in borrowing costs came as the City digested Keir Starmer’s decision to reshuffle his Downing Street organisation on Monday, including putting Darren Jones, the chief secretary to the Treasury, in charge of day-to-day delivery of the prime minister’s priorities.
“The immediate market reaction is not exactly a vote of confidence on these moves,” said Simon French, the chief economist and head of research at the investment bank Panmure Liberum.
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“Markets [are] seeing it as a signal of more gilt issuance/inflation to come,” French said. Concern that the chancellor is being “managed out” is weighing on UK government bonds, suggested Kathleen Brooks, the research director at XTB.
Rob Morgan, the chief investment analyst at Charles Stanley, said: “Bond market trends are adding to the pressure on government finances. Escalating global inflation concerns and fewer price-insensitive buyers such as pension funds have helped pushed up yields on UK government bonds, adding to the question marks around the UK’s fiscal credibility. “The last time there was a threat to Reeves’s position, back in early July, bond yields jumped as the market worried that she could be replaced by a more left-leaning member of the Labour party,” Brooks said.
“At this sort of level, any misstep such as a clumsy handling of previously ‘ironclad’ fiscal rules could be severely punished by markets, risking a ‘doom loop’ of ever higher borrowing costs, greater economic pain and lower tax revenue. The chancellor needs to keep bond markets on side as a matter of priority, as waning investor confidence from this point could be hugely damaging.” “If UK yields continue to rise, and if they start to rise at a faster rate than elsewhere, then it could be a sign the market is pricing in a growing probability that Rachel Reeves will throw away her fiscal rules and borrow more at the budget to fund spending, rather than increase taxes and stymie growth,” Brooks added.
The pound also weakened on Tuesday, falling by more than 1.5 cents against the US dollar to $1.338, on track for its worst day since early April. A recent flurry of reports about potential budget tax rises have worried bond investors, according to Marcus Jennings, the fixed income strategist for global unconstrained fixed income at Schroders.
Stocks fell in the UK and across Europe. London’s FTSE 100 share index lost 0.6%, with domestically focused stocks such as Marks & Spencer (-4.7%), Land Securities (-3.6%) and Persimmon (-3.3%) among the fallers. “Broadly speaking, whilst no specific policy has caused a sell-off in government bonds in isolation, the rush of potential policies is a reminder of how challenged the UK’s fiscal position is. This has likely facilitated a move higher in yields in the UK, notwithstanding the global move in long-end yields,” Jennings said.
There were larger drops in other European markets, with Germany’s Dax down by 1.5%, Spain’s Ibex losing 1.4% and Italy’s FTSE MIB dipping by 1.2%. Potential measures reported in recent weeks include a new tax on the sale of homes worth more than £500,000, or possibly applying national insurance to the rental income received by landlords.
Eurozone government bond yields also rose, and France’s 30-year government bond yields hit their highest levels in more than 16 years on Tuesday, driven by fiscal concerns. While bond prices fell on Tuesday, traders piled in to precious metals in a flight to safety. This pushed the gold price up to a new record high of $3,508 (£2,607) an ounce on Tuesday, while silver rose over $40 an ounce for the first time since 2011.
Anxiety over fiscal sustainability is another factor hitting the bond market, with Donald Trump’s recent tax cuts and spending bill expected to add trillions of dollars to the US national debt.
Stocks fell in the UK and across Europe. London’s FTSE 100 share index lost 0.7% by mid-afternoon, with domestically focused stocks such as Marks & Spencer (-4%), Land Securities (-3.7%) and Howden Joinery (-3.2%) among the fallers.
There were larger drops in other European markets, with Germany’s Dax down by 1.9%, Spain’s Ibex losing 1.8% and Italy’s FTSE MIB dipping by 1.2%.
Eurozone government bonds also weakened, with France’s 30-year government bond yields hitting their highest levels in more than 16 years on Tuesday, driven by fiscal concerns.
French bonds are under pressure as the prime minister, François Bayrou, holds talks with political parties in an attempt to prevent a government collapse before next week’s confidence vote.French bonds are under pressure as the prime minister, François Bayrou, holds talks with political parties in an attempt to prevent a government collapse before next week’s confidence vote.
France’s 30-year government bond yield hit its highest since June 2009 at 4.513%, up 6.5 basis points.France’s 30-year government bond yield hit its highest since June 2009 at 4.513%, up 6.5 basis points.