Governments around the liberal world have watched their borrowing costs rise, following the lead of the US Treasury market. But even in the global bond cycle, Britain stands out.
British government bonds, known as gilts, are selling hard, as investors retreat from the country’s slow economic growth, stubborn inflation and high debt levels. The yield on 10-year gilts, the benchmark, reached 4.9 percent on Tuesday, the highest since 2008, while the yield on 30-year bonds was the highest since 1998.
Rising borrowing costs put the British government’s plan to revive economic growth, with more spending on public services and greater investment, in jeopardy 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,” said Hugh Gimber, strategist at JP Morgan Asset Management.
And it’s not just responsibilities. The British pound is at its lowest level against the dollar in more than a year, outperforming other major currencies in the past month, and shares have fallen in London.
Gilts and foreign government bonds have been tracking the yield on Treasury bonds. Since the US presidential election, borrowing costs have risen as investors with a keen eye on monetary policy expect President-elect Donald J. Trump to implement policies that will lead to inflation, while strong labor market reports have also dampened expectations for interest rate cuts. by the Federal Reserve.
Although the British government is not directly responsible for the increase in borrowing costs, it will face the consequences of its economic plans.
At the end of October, Rachel Reeves, chancellor of the Exchequer, stood in Parliament to present the Labor Party’s first budget in 14 years. He announced an increase of 70 billion pounds ($85 billion) a year in public spending over the next five years, about half of which will be paid for by higher taxes and the other half through borrowing. He also said that he will adhere to strict financial rules that will reduce the level of debt.
The move was seen as a gamble, a decision to spend more public money in the short term, to encourage investment and hopefully lead to economic growth that would improve the country’s debts and avoid further tax increases.
But sooner than expected, this plan is being tested. Rising bond yields have made debt servicing more expensive, wiping out Ms. Reeves.
“We have clear financial rules and we will stick to those financial rules,” said prime minister Keir Starmer on Monday.
If this continues until March, when the Office for Budget Responsibility, an independent watchdog, publishes its mid-year economic forecasts, Ms.
“You have a government left with difficult decisions,” said Mr. Gimber of JP Morgan Asset Management, because he has ruled out tax increases and it will be difficult to reduce spending in already stretched government departments. “Therefore, global investors are left looking at growth and inflation and are looking for more compensation in UK gilts,” he said.
The interests of international investors are particularly important to Britain as almost a third of its government bonds are held by foreign investors.
The implications of the turmoil in the bond markets are still fresh in the minds of the British public. Towards the end of 2022, the government of former Prime Minister Liz Truss announced an aggressive plan to cut taxes and increase borrowing, sidelining the moneylender in the process. Bond yields rose, the pound fell, the central bank had to intervene to stabilize markets and within weeks, Ms Truss was sacked. Fears of a repeat have dried up, prompting the Labor Party to insist it will govern in an iron-clad manner.
“This is very different from the market situation of 2022,” said Mr. Gimber. “That was the period when the gilt yield was leading to global bond maturities. In this case, gilt yields are caught in the movement of bond yields around the world. “
Still, there are few signs of relief. Data published on Wednesday is expected to show inflation sticking to 2.6 percent, above the Bank of England’s two percent target. Traders are betting that the central bank will cut interest rates only once this year.
This will keep the pressure on the government to respond with fiscal measures that will calm the markets without abandoning its economic strategy.
Changing the budget would look “politically weak,” said Benjamin Caswell, an economist at the National Center for Economic and Social Research. These policies are still new, he added, and many of them won’t be enacted until April, so they need time to work with the economy.
“It depends on whether they have the political capital and the will to get it out,” he said.
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