British government bond yields have risen since the launch of the Labor government The budget plan debuts in October It sparked widespread concerns last week, as borrowing costs rose past their highest levels in decades.
Emphasis has been placed on the possibility of reducing public spending or increasing taxes 30 gilded years Their returns amounted to Highest level since 1998. Although it initially declined after the Labor Party won the election in July, it… 2 years gilded Yields also rose again above 4.5%, while the 10-year bond yield reached levels not seen since 2008.
The decline in investor confidence in the UK was particularly highlighted by the concurrent decline in the pound sterling, which on Friday reached its lowest level against the US dollar since November 2023.
Borrowing costs are also rising Eurozone and weEconomists point out that the UK is being influenced by external factors including the return of Donald Trump to the White House and expectations of interest rates being widely higher than previously expected this year.
But the rise in UK bond yields nonetheless poses a major headache for the UK government, which has pledged to do so Restart economic growth While ensuring that debt as a proportion of the economy decreases within five years. Net public sector debt in the UK It currently stands at nearly 100% of GDP.
“The rise in government bond yields has a self-reinforcing feedback loop through the sustainability of UK debt, by increasing borrowing costs used for budgetary purposes,” Michel Tucker, chief European interest rates strategist at ING, said in a note on Friday.
Tucker cited analysis by the Independent Office for Budget Responsibility suggesting that the recent rise in revenues – if sustained – would wipe out the government's estimated £9.9 billion ($12.1 billion) of space to meet its needs. Self-declared financial rules. In addition to the goal of moving towards a lower UK debt-to-GDP ratio over a longer time frame, these rules oblige Labor to cover day-to-day government spending with revenue.
The Institute for Fiscal Studies said on Friday there was a “knife-edge” chance of the UK achieving the latest fiscal rule, but Finance Minister Rachel Reeves may be “unlucky”.
Otherwise, she faces an “unenviable set of choices,” including bringing forward the next appointment, said Ben Zaranko, associate director of the IFS. Changes in how debt is calculated To free up more headroom. Reducing current spending plans; Announcing further tax increases, which may be conditional on changes being made in the coming years; Or do nothing and break her rule.
Economists Ruth Gregory and Hubert de Barroches of research group Capital Economics also said UK Treasuries may be trapped in a “vicious cycle”, where “higher UK yields put pressure on public finances and thus call for a greater tightening of fiscal policies”. Politics, but in return puts additional pressure on the economy.”
Pound against dollar.
Bank of America Global Research strategists said on Friday that Labor was unlikely to violate its rules and would instead announce further fiscal consolidation — measures to reduce public debt, reduce overall public spending or raise taxes — in the spring or earlier.
They added that this could be through spending cuts £40 billion increase in taxes Which was announced by the Labor Party in October.
“This government's commitment to sound fiscal and fiscal rules is non-negotiable,” a Treasury Department spokesperson told CNBC.
“The Chancellor has already shown that tough decisions will be made on spending, with the Spending Review continuing to eliminate waste. Over the coming weeks and months, the Chancellor will leave no stone unturned in her determination to deliver and fight for economic growth.” Working people.”
The UK is in a 'slow growth trap' – but not a small budget crisis
Former British finance minister Vince Cable told CNBC on Friday that rising bond yields were being seen in many countries and it was not a “panic emergency” — but that markets had recognized that Britain was stuck in a “slow growth trap.”
“We've been there for many years, since the financial crisis, then Brexit, then Covid and the Ukrainian war, and we're stuck with relatively high inflation, very slow growth, so the markets are marking the UK down.” “Relatively speaking, but this is not a panic, this is not an old-fashioned balance of payments sell-off,” Cable said.
Labor should have moved towards a broader range of tax increases rather than focusing on increasing National Insurance, which is what happened Criticized by the UK business community“, Cable said. However, he added that the market has broader concerns about UK growth and the global economic picture, which are clouded by external factors such as a weaker Chinese outlook.
Cable also downplayed the comparisons with UK mini budget crisis in 2022when then-Prime Minister Liz Truss's announcement of sweeping tax cuts sparked massive volatility in the bond market.
“The Truss moment was like a prime minister taking a reckless leap into the dark with a huge increase in the budget deficit on the assumption that this would somehow lead to economic growth. Well, that's clearly not what happened this time. The debate is about what happened,” Cable told CNBC. “Whether they've tightened enough and whether they've done it the right way, but it's a different kind of problem.”
This sentiment was widely reflected in the broader analysis. Strategists at Bank of America described the mini-balance sheet comparisons as “exaggerated,” noting that the bar for the Bank of England to intervene in the gold market, as it did at the time, was high.
Capital Economics said the rise in government bond yields last week was an economic headwind but not a crisis, with moves smaller and slower than after the mini-budget. While David Brooks, head of policy at consultancy Broadstone, said there did not appear to be any “systemic issues affecting” the country. Liability based investment trusts (LDI) which was the biggest concern in 2022.
