The Bank of England established the City of London on October 8, 2024 in London, England.
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LONDON – British bond yields surged on Thursday after the ruling Labor Party unveiled a sweeping plan to raise taxes and increase borrowing.
As of 2:33 pm in London, the 2-year UK government bond yield jumped 20 basis points, surpassing 4.5% for the first time since Labor came to power in early July. The 10-year Treasury yield rose 15 basis points to 4.5%.
Yields had already risen shortly after Finance Minister Rachel Reeves announced a budget on Wednesday, which included tax rises worth £40 billion ($52 billion) and promised significant increases in the coming years. Loans.
Yields move in opposite directions to prices.
“What’s most striking is how much borrowing is expected to rise over the next few years,” ING analysts said in a note Wednesday on rising yields.
“For some time we have argued that the government had no choice but to increase real spending. But the amount delivered is certainly higher than many expected just a few weeks ago.”
Analysts cited forecasts by the independent Office for Budget Responsibility that borrowing would rise by an average of 36 billion pounds a year over the next five financial years, taking into account the time required to generate additional tax revenue.
Despite significant volatility this week, the UK government bond market remains relatively stable compared with September 2022, when the UK suffered the so-called “mini-budget crisis”.
At the time, former Conservative prime minister Liz Truss announced billions of dollars in unfunded tax cuts, causing wild swings in bond markets that threatened the stability of UK pension funds and required emergency intervention from the Bank of England. Truss was forced to reverse most of the changes and resigned within weeks.
Analysts have said ahead of the October 2024 budget that such bond market volatility is unlikely to be repeated, mainly because UK inflation has fallen sharply since the Truss era. The latest headlines were 1.7%, compared with 10.1% during Truss’ time as prime minister, which economists say will make markets more tolerant of fiscal expansion.
Following the introduction of the mini-budget, the pound fell to a record low against the dollar, falling 0.4% against the dollar on Thursday to $1.2908. Meanwhile, GBP/EUR fell 0.46% at 2:46 p.m.
British FTSE 100 It fell 1.04% in afternoon trading, reflecting the overall decline in European stock markets.
Deutsche Bank strategist Jim Reid said in a note earlier Thursday that the market reaction to the UK budget “may not have been helped by strong European data pushing up continental yields,” as well as “U.S. earnings Rates are generally facing upward pressure.” ) Trump’s standing in the polls appears to have generally improved in recent weeks. “
He noted that Wednesday’s budget is “probably two-thirds the size of Truss’s mini-budget in terms of fiscal easing” but plans to increase borrowing to increase investment, not to fund tax cuts.
Reed added that the investments “are not expected to bear fruit in terms of growth until five years from now.”
— CNBC’s Ganesh Rao contributed to this article
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