Record borrowing costs in Britain rose to their highest level since the financial crisis, as investors dumped government debt amid persistent inflation fears.
The yield on Britain’s 10-year government bond – closely watched as a measure of future interest payments on public borrowing – reached 4.82 per cent on Wednesday, surpassing peaks seen in the immediate aftermath of Liz Truss’ 2022 mini-Budget.
Yields on 30-year government bonds, which took center stage during the market turmoil two and a half years ago, rose to 5.358 percent on Tuesday – a new high in 27 years. Bond yields rise as prices fall, underscoring the extent of the recent sell-off.
The pound also weakened, falling 1 percent against the dollar to $1.23, underperforming many of its peers – a sign that markets remain skeptical about the UK’s fiscal sustainability.
Investor enthusiasm for the dollar has continued to build on expectations of corporate tax cuts and regulatory rollbacks under the new US administration. The dollar index, which tracks the greenback against six other major currencies, rose 0.46 percent on Wednesday and has increased about 7 percent in the past year. Oil prices fell by more than 1 percent, bucking the broader inflation trend.
Commentators say multiple factors have made the UK particularly vulnerable to rising government bond yields. Britain’s dependence on energy imports has amplified commodity price shocks, while traders – who see more attractive returns on investment-grade private debt – are demanding a higher premium on British government bonds. The additional borrowing unveiled in the October Budget, as well as gradual interest rate cuts by the Bank of England this year, also weighed on gold prices.
Simon French, chief economist at Panmure Librum and a columnist for The Times, noted that “the decoupling of UK long bond yields from their more relevant international benchmark – US long bonds – occurred in 2022 (after the mini-Budget) and has never abated.”
This toxic combination of weak sterling and rising yields was last seen during the fallout from Liz Truss’ mini-budget, when markets seriously questioned Britain’s fiscal resilience.
The recent rise in borrowing costs directly affects the government’s finances by raising debt servicing costs, eroding the Chancellor’s spending margin. A report by Capital Economics estimates that £8.9bn of Rachel Reeves’ £9.9bn fiscal reserve has already been eroded, raising the possibility of higher taxes or cuts to public spending.
Unless government bond yields stabilize lower by March, when the Office for Budget Responsibility (OBR) updates its forecasts, Reeves may have to rein in Whitehall’s budgets to balance the government’s books. A Treasury spokesman stressed that adherence to fiscal rules was “non-negotiable”, although the Chancellor pledged not to make tax changes in her spring statement on 26 March. This leaves spending cuts as the most likely option if borrowing costs remain high.
Jim Reid, an analyst at Deutsche Bank, said the government may be forced into further tax increases if yields remain high, while acknowledging that such moves would face political resistance.
Reeves has already forecast a 4.3 percent increase in department expenses this year and 2.6 percent for 2025-2026. Furthermore, budgets are expected to rise by only 1.3 percent. Any change in spending allocations could change the upcoming spending review in June.
A Treasury spokesman said this would not “get ahead of” the OBR figures, but stressed that “no one should be in any doubt about the Chancellor’s commitment to economic stability and sound public finances.”
Government bonds were the worst-performing major asset class this week, reflecting global bond market jitters in the United States, Germany and France. Yields rose late Tuesday after data indicating continued inflationary pressures in the United States, pushing 10-year Treasury yields to levels not seen since April 2024. Benjamin Schroder, chief interest rate strategist at ING, noted that “Bearish tendencies in the United States have strong spillover effects on the economy.” Gold market.”
The pound suffered as investors gravitated towards the dollar, which benefited from uncertainty over Donald Trump’s trade policy, including provocations over the Panama Canal and Greenland. Markets are now anticipating smaller interest rate cuts by both the Federal Reserve and the Bank of England, a scenario that often boosts currencies. However, the British pound failed to follow suit, reflecting the severity of the fiscal and inflationary challenges facing the UK.
Kenneth Brough, a currency strategist at Société Générale, warned that market conditions were “set for bond tantrums”, with ever-increasing supply and unpredictable policies heading into 2025. The worry in Whitehall is that such turmoil could continue. , which puts Britain’s public finances – and the Chancellor’s political position – in an increasingly precarious position.
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