Soaring gilt yields aren’t just about the UK economy | Wilnesh News

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The UK government’s long-term borrowing costs are now at It has almost reached the highest level in three decades. As of 6 a.m. London time, 30 years in Phnom Penh It was 5.359%, the highest level since 1998.

Yields on gilts (the UK’s fancy term for government debt such as U.S. Treasuries) soared after Tuesday’s announcement from the UK Debt Management Office be auctioned Treasury bonds worth £2.25 billion ($2.83 billion) with a maturity of 30 years.

Typically, bond yields rise as interest rates rise, and rates stay high when inflation remains stubbornly above most central banks’ 2% target.

In the UK this is a problem. The overall inflation rate increased to 2.6% in November, rising for the second consecutive month.

To make matters worse, UK gross domestic product contracted 0.1% month-on-month in October, raising fears of stagflation – when an economy struggles with high inflation and economic stagnation.

The Labor government’s plans to raise taxes and significantly increase borrowing have also weighed on gilt prices, which move inversely to yields.

Also consider currency trends. Higher government bond yields typically translate into stronger currencies as their returns attract global investors, boosting demand.

this GBPHowever, despite rising gilt yields, the yuan fell against the dollar.

Taken together, these factors paint a weak picture of the economy, so investors will naturally demand higher yields if they are to borrow money from the UK government.

But we should not exaggerate the situation. Consider Liz Truss’s disastrous 2022 “mini-budget”, which led to a massive sell-off in gilts and sent yields soaring within days (yields typically move at a glacial pace).

During this period, U.S. 30-year Treasury bond yield About 3.5%. On Friday, the rate was at 4.9%, meaning UK gilts are keeping pace with US Treasuries, rather than spinning out of control. In other words, the recent rise in gilt yields is not necessarily due to unrest in the UK, as global bond yields, interest rates and inflation concerns remain high.

It’s always scary when a country’s financial markets experience turmoil. This may make the situation more bearable when others face the same problem.

—CNBC’s Chloe Taylor, Jenni Reid, Karen Gilchrist and Elliot Smith contributed to this report.