The UK bond markets have sent a powerful warning shot to Prime Minister Keir starmer’s government as the yields on long-dated bonds surged to their highest level in over a quarter century.
The dramatic move, which is part of a global sale-off, tightens a fiscal straitjacket about the administration. It increases pressure for painful tax hikes or spending reductions ahead of an important autumn budget.
The 30-year gilt rate rose to 5.67 percent, a level that has not been seen since 1998. Yields on 10-year bonds also increased to 4.78 percent.
The pound fell on the news as a sign of waning investor confidence, as borrowing costs for the government continue to rise.
Fiscal straitjacket before the autumn budget
This rise in borrowing costs is more than just a statistical curiosity. It is a direct, immediate headache for the Chancellor of Exchequer Rachel Reeves.
She is under pressure to find a solution to improve the UK fiscal position. This task is made politically dangerous by the recent and embarrassing U turn on welfare reforms, which exposed deep divisions in the ruling party.
The government is now at mercy of the bond markets. Economists warn that it will need to raise taxes soon to stay within its own fiscal rules. The room for manoeuvre is rapidly shrinking.
Bloomberg reported that “Tax increases are inevitable. However, we are now at a point where further tax increases could be counterproductive.” Mohit Kumar is the chief European strategist for Jefferies International.
We continue to be negative on the UK curve and continue to favor steepeners.
(Courtesy: Bloomberg)
The global undertow
The UK’s fiscal woes may be a major domestic driver, but the country is at the epicenter a much bigger global storm. The movement in gilts is a part of a wider, worldwide decline in long-maturity debt.
This global selloff reflects an important shift in the market. Traditional buyers such as pension funds are no longer interested in these securities. This change is compounded by the deep-seated concern that the world will enter a new era with structurally higher inflation.
Downing Street’s desperate attempt to reset
The market’s immense pressure appears to be a major catalyst for recent Prime Minister actions.
Starmer, in a bid to regain control over the economic narrative and to reassert the authority of his government, announced a number of changes to Downing Street on Monday.
The reshuffle was seen as an attempt to gain more influence on economic policy, at a time when the global market forces threaten to dictate government agenda.
The stage is set for an autumn of tension, with a government caught in a tight corner between the unforgiving logic on the bond market and treacherous realities within domestic politics.
This post UK bond rates hit 1998 highs: How a global saleoff boxed the government in may be modified as new developments unfold
