Medium-term borrowing costs for the UK government hit a fresh 19-year high on Thursday, as investors continued to offload global bonds amid fears of rising inflation.
Recent dramatic moves in government bond markets have been driven by international factors, but will increase the pressure on John Healey ahead of his first budget as chancellor on 28 October.
The yield, or interest rate, on 10-year UK government bonds had jumped 0.06 percentage points by lunchtime in London, to 5.515%. That was the highest level since July 2007, when the global financial crisis was starting to unfold.
Yields on 20- and 30-year UK government bonds, which are known as gilts, had also risen significantly, to their highest level since as long ago as 1998. Yields go up when bond prices go down.
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 at the time of her spring statement 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.
Some economists are warning the chancellor not to go too far in rebuilding the Treasury’s headroom, however. 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.
Investors appear to be anxious about higher inflation and runaway government spending. France has been hardest hit, as Paris battles to pass a budget, but the selloff has been widespread.
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%.
Disclaimer : This story is auto aggregated by a computer programme and has not been created or edited by DOWNTHENEWS. Publisher: theguardian.com
