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Concerns about a stagnating British economy and accelerating inflation are unnerving investors, pushing borrowing costs to the largest premium to German debt yields since 1990.
The spread between the two countries' 10-year bonds has risen to more than 2.3 percentage points, the highest level since German reunification and well beyond the peak reached after Lys Truss's ill-fated “mini” budget two years ago.
“Stagflation fears have returned to the UK bond market,” said Robert Deschner, senior portfolio manager at Neuberger Berman.
He added that investors were also “a bit nervous” about the scale of the Labor government's borrowing plans, which could increase further if weak growth drags down tax revenues.
The gold market moves come ahead of the Bank of England's final policy meeting of the year on Thursday, with investors betting on continued… Economic inflation It will prevent the central bank from cutting its benchmark interest rate, despite the economic recession.
Recent data showed GDP contracted unexpectedly For the second month in a row in October.
Height in doctrine The yields also brought government borrowing costs back to near the one-year high hit last month after Chancellor Rachel Reeves' October Budget, which briefly spooked investors by ramping up Treasury debt issuance plans.
Ten-year government bond yields rose as much as 0.06 percentage point to 4.58 percent on Wednesday after figures showed UK inflation It accelerated to 2.6 percent In November.
“High borrowing costs continue to undermine the UK’s financial position,” said Mark Dowding, chief investment officer at RBC Bluebay Asset Management.
“If government bond yields rise above levels seen in the Truss tantrum, Rachel Reeves could end up breaking more promises and having to raise taxes or cut spending in order to allay debt sustainability concerns.”
The latest rise in yields from less than 4.2 per cent two weeks ago came as traders bet the Bank of England will now make just two quarter-point cuts next year, down from four cuts expected in October.
Craig Inches, head of interest rates and cash at Royal London Asset Management, said the data “raises questions about the Bank of England's ability to cut interest rates.”
The yield gap with the eurozone is also largely due to investors' expectations that the European Central Bank will reduce borrowing costs much faster than the Bank of England, as it faces a sharper slowdown in growth.
In addition, the rise in yields reflects a broad sell-off in the US Treasury market, as investors have trimmed their expectations for a 2025 Fed rate cut since Donald Trump won the election last month.
Economists have long expected a rebound in UK price pressures towards the end of the year, due to so-called base effects, since energy costs fell a year ago, the point of comparison when calculating annual inflation.
However, Bank of England policymakers are also concerned about the scale of price increases in the services sector, as well as rapid wage growth.
The 5 percent growth in services prices in November was above the Bank of England's forecast of 4.9 percent and well above the rate considered in line with the central bank's 2 percent inflation target.
Separate figures earlier this week showed that average weekly earnings in the UK, excluding bonuses, rose faster than expected by 5.2 per cent in the three months to October.
Higher government spending and borrowing in Reeves' budget are also likely to increase inflationary pressures.
These measures will add 0.75 percentage points to gross domestic product and about 0.5 percentage points to consumer price inflation in about a year, according to the latest set of forecasts released by the Bank of England last month.
