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The UK's 10-year borrowing costs rose to the highest level since the global financial crisis and the pound sank on Wednesday as an intense bond sell-off threatened the Labor government's ability to meet self-imposed budget rules.
The 10 years doctrine The yield rose 0.13 percentage points to 4.82 percent, its highest level since 2008. Yields move inversely with prices.
UK borrowing costs have risen much faster in the UK so far in 2025 than in other major economies, as investors worry about large government borrowing needs and the growing threat of stagflation on the economy.
“It's a global sell-off, but it's exacerbating in the UK due to the toxic mix of a flat economy, flat inflation and a deteriorating financial outlook,” said Andrew Pease, chief investment strategist at Russell Investments.
The yield on 30-year government bonds – which rose on Tuesday to their highest level since 1998 – also continued to rise, reaching 5.38 percent.
The pound fell 1.1 percent against the dollar by late afternoon to $1,234, its weakest level since April. In the stock market, the domestic market-focused FTSE 250 index fell 2 percent.
Chancellor Rachel Reeves has left herself a slim margin of £9.9bn against her revised fiscal rules in the Budget even after announcing a £40bn tax rise package aimed at “wiping the slate clean” from the public finances.
Since then, increases in government debt yields have put budget room for maneuver under threat. The level of bond yields is an important factor in determining the budget ceiling due to its effects on the government’s interest bill, which exceeds £100 billion annually.
The latest increase in interest rates on Wednesday means the chancellor's leeway against the current budget rule has now been eliminated, according to Ruth Gregory of Capital Economics.
If high yields persist, this may force the Treasury Secretary to announce corrective measures to keep budget policy on track. On March 26, Office of Budget Responsibility Announces a new set of financial forecasts that will take into account movements in bond yields.
“The Chancellor no longer has room to go against her financial rules given the upward move in yields, and the market is wondering what the next step is from here,” said Ben Nicholl, a senior fund manager at Royal London Asset Management. “Raising taxes or cutting department spending will only put further downward pressure on growth, which in turn puts pressure on tax revenues when borrowing is already high.”
The Finance Minister has pledged to make major tax changes only once a year, in a single “fiscal event”. The next one isn't expected to happen until the fall. As such, any corrective action in March will likely come in the form of spending restrictions, officials noted.
A Downing Street spokesman said: “We are committed to achieving the largest budget surplus in 20 years. I will not comment on specific market movements. . . But when it comes to our approach to the economy, we always put economic stability and sound public finances first.
Ben Zaranko, an economist at the Institute for Economic Studies, said restoring progress to October levels through tougher spending plans would mean limiting growth in real terms in departmental day-to-day spending from 1.3 per cent a year to just under 1 per cent. Foundation for Financial Studies.
The government is due to announce the results of a multi-year departmental spending review around June.
“We are in the danger zone” when it comes to the chancellor’s budget, Zaranko said. “The growth and interest have moved in the wrong direction for her.”
Adding to the problems facing the government are weak GDP figures, which will also play a role in the Office for Budget Responsibility's forecasts.
Economists expected the agency to reduce its growth forecast by 2 percent for 2025 in light of the weak recent data. However, the impact on the budget margin will depend on whether the Office for Budget Responsibility decides that the loss of production is permanent or can be made up later in Parliament.
“Next spring’s statement, spending review and autumn budget are likely to be painful consequences of the chancellor’s historic opening budget,” said Sanjay Raja, economist at Deutsche Bank.
The latest decline in the government bond market comes after weeks of rising yields on long-term US Treasuries and German bunds, although Wednesday's sell-off was sharper in the UK.
The simultaneous sell-off in bonds and sterling – which typically benefit from higher yields – carries echoes of the market fallout from Liz Truss' ill-fated “mini” Budget in 2022, analysts said.
“What's happening in the gold market has undermined confidence in the pound a little bit,” said Chris Turner, head of financial markets at ING, saying some investors were unwinding their recent bets that the pound would be more resilient than other major currencies against sterling. dollar.
“Forex traders are looking to the government bond market and are concerned about whether something similar will happen into 2022,” Turner said.
Additional reporting by Jim Pickard
