The UK government's borrowing costs have fallen to their lowest level since July, providing a boost to Chancellor Rachel Reeves as she prepares for next month's autumn budget. The yield on 10-year government bonds briefly dipped below 4.5% early on Friday for the first time in three months, before settling around that level.
The decline in bond yields was driven by a global flight to safe-haven assets amid escalating US-China trade tensions and signs of stress in the US banking system. Two US regional banks reported exposure to millions of dollars of bad loans and alleged fraud, triggering sharp falls in global stock markets and a record high for gold.
However, investors also attributed the drop in UK borrowing costs to comments made by Reeves at the International Monetary Fund meetings in Washington DC. In interviews, the chancellor signalled readiness to raise taxes on the wealthy and consider spending cuts in the budget, which helped improve sentiment in the gilt market.
The Institute for Fiscal Studies has warned that Reeves must take bold action to address a potential £22 billion shortfall in public finances. The Office for Budget Responsibility is expected to downgrade its forecasts significantly, citing higher borrowing costs, weaker productivity, and welfare U-turns. Meanwhile, recent economic data showed unemployment rising to 4.8%, wage growth slowing, and GDP growing just 0.1% in August after a contraction in July.
Market analysts suggested that the “relatively soft” data could encourage the Bank of England to cut interest rates. However, UK borrowing costs remain higher than those of other G7 economies. City investors are looking for concrete spending cuts in the budget to demonstrate commitment to fiscal discipline, according to a fixed income strategist at Barclays.
