The interest rate on 10-year UK government bonds reached its highest level since July 2007 on Thursday, as investors continued to offload global bonds amid fears of rising inflation.
The yield, or interest rate, on 10-year gilts jumped 0.06 percentage points by lunchtime in London to 5.515%, the highest since the global financial crisis was starting to unfold. Yields on 20- and 30-year gilts also rose significantly, reaching their highest levels since 1998. Yields go up when bond prices go down.
Pressure on the chancellor
Recent dramatic moves in government bond markets have been driven by international factors, but will increase pressure on John Healey ahead of his first budget as chancellor on 28 October. Economists believe rising borrowing costs and a weaker growth outlook are likely to have wiped out around half of the £24bn buffer against Labour’s fiscal rules that Healey’s predecessor, Rachel Reeves, built up in March – perhaps significantly more.
Healey is expected to raise taxes at the budget to partly rebuild that cushion, as well as paying for policy interventions including the six-month VAT cut on electricity bills and a modest energy support package for the poorest households.
Warnings and international context
Some economists are warning the chancellor not to go too far in rebuilding the Treasury’s headroom. Andrew Wishart, of Berenberg Bank, said: “Raising taxes to keep the surplus close to the size it was in the March forecast (ie to ‘maintain the headroom’) would do unnecessary damage to economic incentives.” He argues that gilt yields are likely to come back down over the next year, with the Bank of England likely to make fewer rate rises than the four that investors currently expect.
The Bank is widely expected to raise interest rates at its November meeting to tackle surging inflation, echoing moves already made by the European Central Bank, Federal Reserve and Bank of Japan. The bond selloff has intensified across big economies in recent days, as oil prices have soared, with no resolution of the Middle East conflict in sight. France has been hardest hit, as Paris battles to pass a budget, but the selloff has been widespread.
Impact on borrowers
Kristalina Georgieva, managing director of the International Monetary Fund (IMF), has urged governments to tighten their belts in response to rising bond yields. “My message to the world’s economic policymakers will be this: we cannot keep delaying necessary policy action – you have the tools, now have the wisdom to use them,” she said, ahead of next week’s IMF annual meeting in Bangkok.
Higher yields not only push up costs for indebted governments, but have knock-on effects for borrowers across the economy, including homeowners and businesses. The US Treasury secretary, Scott Bessent, has tried to rein in yields on the US’s long-term debt by increasing buybacks of its government bonds, known as treasuries, but the policy appears to have had little impact. Yields on the 30-year treasuries targeted by Bessent’s policy were about 5.235% when he announced the doubling of buybacks in August, but have since surged above 5.7%.
