Following the lead of the US Treasury market, governments around the world are uncomfortably watching their borrowing costs rise. But despite the global defeat, Britain is at the forefront in terms of bonds.
British government bonds, known as gilts, are facing a particularly harsh selloff as investors are put off by the country’s low economic growth, stubborn inflation and high debt levels. The yield on 10-year gilts, the benchmark rate, reached 4.9 percent on Tuesday, the highest since 2008, while the yield on 30-year bonds was the highest since 1998.
A rise in borrowing costs has put the British government’s plan to revive economic growth by allocating more money for public services and more investment at risk, less than three months after it was announced.
“At a time when yields are rising everywhere, global investors are looking at the UK as the weakest link in the chain,” said Hugh Gimber, strategist at JPMorgan Asset Management.
And it’s not just bondage. The British pound is at its lowest against the dollar in more than a year, underperforming other major currencies over the past month and sending shares falling in London.
Gilts and government bonds of other countries are tracking yields on treasury bonds higher. Since the US presidential election, borrowing costs have risen as investors with an eye on fiscal discipline expect President-elect Donald J. Trump will pursue policies that will increase inflation, while continued strong labor market reports have also tempered expectations of an interest rate cut. By the Federal Reserve.
Although the British government is not directly responsible for the increase in its borrowing costs, it will find the impact on its economic plans.
At the end of October, Rachel Reeves, the Chancellor of the Exchequer, stood in Parliament to deliver the Labor Party’s first budget in 14 years. He announced an annual increase in public spending by 70 billion pounds ($85 billion) over the next five years, with about half paid for by higher taxes and the other half through borrowing. She also said that she would stick to strict fiscal rules which would bring down debt levels.
The move was considered a gamble, a decision to spend a lot of public money in the short term, encourage investment, and hope for greater economic growth, which would improve the country’s debt load and avoid raising taxes again.
But this plan is being tested sooner than expected. The rise in bond yields has made it more expensive to repay debt, eroding the buffer for Ms. Reeves’ fiscal rules.
“We have clear fiscal rules and we will follow those fiscal rules,” the prime minister, Keir Starmer, said. Said on Monday.
If that continues until March, when the Office for Budget Responsibility, an independent watchdog, publishes its semiannual economic forecasts, Ms. Reeves will have to decide whether to raise taxes further or cut spending to stick to her rules. should be reduced.
“You have a government that is left with some difficult choices, because it has refused to raise taxes again and it will be difficult to cut spending from government departments that are already overstretched,” said Mr Gimber of JPMorgan Asset Management. “Therefore, global investors are looking at a mix of growth and inflation and are seeking more compensation from UK gilts,” he said.
The desires of global investors are particularly relevant for Britain as almost a third of its government bonds are owned by foreign investors.
The implications of the bond market turmoil are fresh in the minds of Britons. In late 2022, the government of then-Prime Minister Liz Truss announced an aggressive plan to cut taxes and increase borrowing, bypassing fiscal oversight in the process. Bond yields rose, the pound fell, the central bank had to intervene to stabilize the market and within a few weeks, Ms Truss was ousted. Fears of a repeat remain, which have encouraged the Labor Party to insist that it will govern with strict fiscal discipline.
“This is very different from the market outlook for 2022,” Mr Gimber said. “That was a time when gilt yields were actually pushing global bond yields higher. “This time, gilt yields are getting caught up in the global bond yield movement.”
Still, there are little signs of relief. Data published on Wednesday expect inflation to remain at 2.6 percent, well above the Bank of England’s 2 percent target. Traders are betting that the central bank will cut interest rates only once this year.
This will keep pressure on the government to respond with market-calming fiscal plans without abandoning its economic strategy.
Benjamin Caswell, an economist at the National Institute of Economic and Social Research, said the budget change would look “politically weak.” These policies are still new and many of them won’t be implemented until April, he said, so they need time to work on the economy.
“It depends on whether they have the political capital or not and the will to pull it out,” he said.