Governments around the world are seeing their borrowing costs rise as the US Treasury market dominates. But even in the global debacle in bonds, Britain stands out.
British government bonds, known as gilts, are a particularly hard sell, as investors pull back. Low economic growth of the country, stubborn inflation and high levels of debt. The yield on 10-year gilts, the benchmark rate, hit 4.9 percent on Tuesday, the highest since 2008, while the yield on 30-year bonds was the highest since 1998.
By increasing borrowing costs British government’s plan to revive economic growthBy allocating more money to public services and more investment, the threat is less than three months from being announced.
“At a time when yields are rising everywhere, global investors are looking at Britain as the weakest link in the chain,” said Hugh Gamber, a strategist at JP Morgan Asset Management.
And it’s not just bonds. The British pound is at its lowest level against the dollar in more than a year, the worst performance against other major currencies in the past month, and stocks in London fell.
Gilts and government bonds of other countries More are tracking yields on Treasury bonds.. Since the US presidential election, borrowing costs have risen as fiscally disciplined investors expect President-elect Donald J. Trump to enact policies that will boost inflation, while Reports of continued strong labor market It has also dampened 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 have to face the implications for its economic plans.
At the end of October, Rachel Reeves, the Chancellor of Exchequer, stood in Parliament to present the first Labor Party budget in 14 years. He announced a 70 billion pound ($85 billion) annual increase in public spending over the next five years, about half of which would be paid for through higher taxes and the other half through borrowing. She also said she would stick to tight fiscal rules that would bring down debt levels.
There was action. It is considered gambling.The decision to spend a lot of public money in the short term, encouraging investment and hopefully greater economic growth, will improve the country’s debt burden and avoid significant tax increases again. .
But sooner than expected, the plan is being tested. Rising bond yields have made debt repayments more expensive, eroding the buffer of Ms Reeves’ fiscal policy.
“We have clear fiscal principles and we are going to stick to those fiscal principles,” Keir Starmer, the prime minister, said. said on Monday.
If that holds 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 change her rules. Costs must be cut to survive.
“You have a government that has some tough choices to make,” said JPMorgan Asset Management’s Mr. Jumber, as he has ruled out raising taxes again and cutting spending on government departments will be difficult. which are already spread. “Therefore, global investors are looking at the mix of growth and inflation and are demanding more compensation from UK gilts,” he said.
The wishes of global investors are particularly relevant for the UK as over a third of its government bonds are owned by foreign investors.
The effects of the turmoil in the bond markets are fresh in the minds of Britons. In late 2022, the government of then Prime Minister Liz Truss made an announcement. An aggressive plan to cut taxes and increase borrowingSidelining the financial watchdog in the process. Bond yields rose, the pound fell, the central bank had to intervene to stabilize markets and within weeks, Ms. Truss was evicted.. Fears of a relapse remain, prompting the Labor Party to insist it will govern with steely fiscal discipline.
“It’s a very different market scenario in 2022,” Mr Jumber said. “It was a period where gilt yields were really outpacing global bond yields. This time, gilt yields are catching up to the move in global bond yields.
Still, there are few signs of relief. Data published on Wednesday expected inflation to hold at 2.6 percent, 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 fiscal plans that calm markets without abandoning its economic strategy.
Benjamin Caswell, an economist at the National Institute of Economic and Social Research, said the budget changes would look politically weak. He added that these policies are still new, and many of them won’t take effect until April, so they need time to work through the economy.
“It depends on whether they have the political capital and the will to get it out,” he said.