Andy Burnham spent his first Prime Minister’s Questions trying to calm jittery bond markets after another rise in government borrowing costs
Mortgage borrowers have been warned it could be a matter of days before new home loan rates start to rise as UK government borrowing costs hit their highest level since the 2008 financial crisis.
Government long-term borrowing costs went soaring amid a global bond sell-off partly linked to signs of escalation in the Middle East conflict and the concern that inflation could follow. It came as Andy Burnham attempted to calm bond markets during his first appearance at Prime Minister’s Questions.
The Prime Minister said ministers were taking steps to reduce debt as he attempted to stress his administration’s fiscal responsibility. He said: “We are taking the action needed to get debt down.
“This will be a Government grounded in fiscal responsibility. It will stick to the fiscal rules, but at the same time, we will help reduce cost-of-living pressure on our constituents, and that’s the approach that we will take.”
Mr Burnham blamed the rising cost of borrowing and market turbulence on the Tories. Responding to leader Kemi Badenoch’s question about his government’s plans to tackle rising debt costs, the PM said: “When they [the Conservatives] were in government, we saw 14 years of stagnant growth.
“We saw 14 years of debt rising as a percentage of GDP. I would say to her that the turbulence on global market are because of that exposure that they left behind.”
Below we’ve broken down what you need to know, and the real-life implications of the bond market turmoil.
What’s happening in the bond markets?
Bonds are a form of IOU and are used by governments around the world to raise money to meet spending commitments. In the case of the UK, those bonds are known as gilts. The interest rate charged on those bonds – the yield – has been steadily rising both here and for governments globally. That’s partly to do with the ongoing Middle East conflict and concerns about higher for longer interest rates and inflation.
However, the UK is one of the countries feeling the most pain as yields have been going up among the fastest. That’s a big concern as the UK is already spending more than £100billion a year on debt interest and the country’s overall debt mountains stands at a nose-bleeding high near £3trillion. There is also uncertainty among investors about the scale of Mr Burnham’s fiscal plans ahead of next month’s Budget.
How does it impact me?
It affects everyone of us in one way or another. Why? Because the more the government spends on borrowing is less that can go on public services and other forms of spending and investments. In short, every pound that goes on higher borrowing costs is a pound less for what matters to communities across the country.
But it doesn’t end there. As well as determining government borrowing costs, gilts also influence the cost of of fixed rate mortgages. When the yields on UK government bonds rise, banks’ wholesale funding and hedging costs also increase.
Justin Moy, managing director at Chelmsford-based EHF Mortgages, said: “Any increase in bond yields sharply affects our economy, so if this continues for more than a few days, it will have a lasting impact on our economy and our pockets. Mortgage rates are days away from wholesale increases, specialist lenders have already moved, and others will have to follow.
“Higher bond yields will also push inflation higher, as the government will need to spend more just to cover its own debt costs. It’s a self-defeating prophecy: the government needs to act swiftly before Labour looks for a handout, as they did in the 1970s.”
That said, we’ve just had First Direct lowered mortgages rates across the majority of its fixed rate range, with reductions of up to 0.19 percentage points available from today.
And that’s not all…
Russ Mould, investment director at broker AJ Bell, says credit card, and car loan interest rates will rise if bond yields rise. And company profits could take a hit if a higher cost of debt dents demand and investment.
He added: “That in turn could affect equity valuations and headline stock market indices, which could also falter if higher bond yields persuade investors to seek income from gilts rather than equities.”