UK borrowing costs hit a post-Budget peak yesterday
Yields on ten-year UK bonds – known as gilts – surpassed levels seen last week to reach a new one-year high of 4.541 per cent.
Meanwhile, an auction of new ten-year gilts attracted the weakest demand since December, with bids covering the £3.75billion on offer 2.81 times.
Investors are anxious about Chancellor Rachel Reeves’s £162billion borrowing binge to fund her spending pledges – and is expected to add to inflation pressures.
Debt shock: Yields on ten-year UK bonds – known as gilts – surpassed levels seen last week to reach a new one-year high of 4.541%
That has pushed back expectations of how quickly the Bank of England will cut interest rates, resulting in a sell-off of bonds – whose yields rise as their prices fall.
The sheer scale of bond issuance coming to the market is also weighing on the price.
The Bank is expected to cut rates by a quarter of a percentage point tomorrow and markets will be closely watching for clues on its next move.
Experts warned that the rise in gilt yields could jeopardise the Chancellor’s plans for balancing the books because it will add billions to the cost of paying interest on the Government’s debt pile.
Some of this was planned for but the bond market fall-out has so far been worse than expected.
Richard Hughes, chairman of the Office for Budget Responsibility (OBR), told the Commons Treasury select committee yesterday: ‘We had expected the gilt market to be a bit surprised.’
The OBR had forecast the Budget to cause a quarter of a percentage point rise in yields. He said where they had settled was ‘broadly in line with that expectation, maybe a little bit above, but not significantly’.
But after he spoke, yields rose further.
Julian Jessop, economics fellow at the Institute of Economic Affairs (IEA), pointed out that yields on five-year gilts were expected to average 3.6 per cent in the fourth quarter of this year and 4 per cent between 2025 and 2028.
But yesterday they were trading at more than 4.4 per cent, a five-year high. ‘Of course, a lot could still happen between now and 2028,’ Jessop said. ‘But the early signs are not encouraging.’
Yields on UK bonds are rising faster than those on their US and German equivalents.
The premium charged by investors for buying gilts rather than German bunds grew to 2.14 percentage points yesterday, the biggest since September 2023.
Analysts at Deutsche Bank said: ‘Following on from the Budget, gilt yields have risen. Short-term interest rate expectations have picked up.
‘Higher interest costs have added effectively another £5billion in debt servicing costs to the Chancellor’s bill, eating further into her fiscal headroom.’
DIY INVESTING PLATFORMS
Affiliate links: If you take out a product This is Money may earn a commission. These deals are chosen by our editorial team, as we think they are worth highlighting. This does not affect our editorial independence.