The UK's long-term borrowing costs have reached their highest level since 1998, as a bond sell-off threatens to wipe out the “headroom” enjoyed by Chancellor Rachel Reeves under her recently overhauled fiscal rules.
The yield on 30-year government bonds reached 5.25 per cent on Tuesday, surpassing the previous peak in October 2023, and surpassing levels reached during the height of the market fallout from Liz Truss's ill-fated “mini” Budget the previous year.
The new high came after the Treasury paid its highest borrowing cost in 30 years this century, selling £2.25 billion of new debt at a yield of 5.20 per cent.
Economists warned on Tuesday that recent gains in interest costs, if they persist, will erase the room for additional borrowing allowed by the chancellor's budget rules. The moves come alongside weak growth forecasts which could further worsen the outlook as ministers await a new set of fiscal forecasts in March.
The pressures in the UK market come amid a global sell-off in government bonds in recent months, driven in part by fears that US President-elect Donald Trump's tariff plans will be inflationary.
Investors were gilded Especially worried A combination of weak growth and persistent price pressures will push the UK into a period of stagflation, with the Bank of England restricted from cutting interest rates to support the economy.
“You'll probably have some buyers' strike action at the moment,” said Craig Enches, head of cash and interest rates at Royal London Asset Management. He said a combination of the high volume of long-term government bond sales and “mixed” economic data in the UK was deterring investors from ultra-long-term debt.
The UK economy contracted for the second month in a row in October and failed to grow in the third quarter. Business confidence has taken a major hit in the wake of Reeves' decision to impose a £25 billion increase on employers' National Insurance contributions in the Budget, which, along with planned increases in the National Living Wage, will push up labor costs.
Meanwhile, recent data shows continuing signs of steady inflation. Consumer price growth accelerated in November to 2.6 percent from 2.3 percent in the previous month, prompting investors to reduce their hopes for a rate cut in 2025.
Treasuries' movements will be a source of serious concern at the Treasury, given that Reeves left itself only £9.9bn of headroom against its main fiscal base when setting out the government's borrowing plans. October budget.
The Treasury expects a new round of official forecasts from the Office for Budget Responsibility in March, which will include a new estimate of how much room for maneuver the government has against its self-imposed financial system.
Ruth Gregory, an economist at Capital Economics, said the recent gains in yields and interest rate expectations, if they persist, would leave the chancellor with just £1.1 billion of freedom against the chancellor's main budget rule, which requires her to cover current spending – excluding investment -. With tax receipts.
This is before any adjustments are made to the Office for Budget Responsibility's economic forecasts, which will also impact the fiscal outlook.
The final rise forecast will not be determined until the next OBR forecast is due to be released. The financial watchdog is required to produce two forecasts every financial year, and is due to provide an update on March 26 on whether Reeves is on track to meet its borrowing rules.
But a raft of forecasts suggesting the Treasury is breaching its own fiscal rules would pose a massive headache coming so soon after the Chancellor's first Budget.
The situation is particularly difficult given the Treasury Secretary's decision to hold only one major fiscal event a year, meaning she intends to wait until this fall before moving forward with her next set of tax and borrowing decisions. This means that any expected breach of fiscal rules before then may need to be addressed through tough spending measures.
“If the Office for Budget Responsibility decides in March that a key fiscal rule has been breached, to maintain fiscal credibility, the Chancellor may need to take some form of action,” Gregory said.
“So there is a risk that meeting the key fiscal rule will require additional tax increases to raise revenues or restrict spending. Either way, there appears to be a risk that fiscal policy will be more stringent than others.”
A Treasury spokesman said it would not pre-empt the Office for Budget Responsibility's expectations, but adherence to fiscal rules was “non-negotiable”, adding: “The Chancellor has been clear that she will not repeat the likes of the October Budget, and is now focused on rooting out the scourge of this Budget.” “Waste in public spending through spending review and economic development.”
