British government bond yields have been rising since the Labor government unveiled its first budget in October, sparking widespread concern last week as borrowing costs rose to multiple ten-year highs.
Prospects of public spending cuts or further tax increases come into focus 30 years in Phnom Penh Yields hit their highest levels since 1998. 2 years in Phnom Penh Yields have also risen back above 4.5%, with the 10-year yield reaching its highest level since 2008.
The simultaneous fall in sterling particularly highlighted the weakening investor confidence in the UK, with the pound hitting its lowest level against the dollar since November 2023 on Friday.
Borrowing costs are also rising in the euro zone and the United States, and economists note that Britain is being pressured by external factors, including the return of Donald Trump to the White House and expectations that interest rates will generally be higher than previously expected this year.
But soaring UK government bond yields remain a major headache for the British government, which has pledged to restart economic growth while ensuring that debt as a share of the economy falls within five years. UK public sector net debt It currently accounts for almost 100% of GDP.
Michiel Tukker, senior European rates strategist at ING, said in a note on Friday: “The rise in gilt yields creates a self-reinforcing feedback in the UK’s debt sustainability by increasing the cost of borrowing for budget purposes. cycle.
Tuke cited analysis by the independent Office for Budget Responsibility, which suggested that the recent rise in yields – if sustained – would wipe out the government’s projected 9.9 billion pounds ($12.1 billion) of headroom. self-declared fiscal rules. As well as achieving the goal of reducing the UK’s debt-to-gross domestic product ratio over the longer term, the rules also require Labor to use revenue to pay for day-to-day government spending.
The Institute for Fiscal Studies think tank said on Friday there was a “knife edge” on Britain’s chances of achieving the latter fiscal rule, but that Finance Secretary Rachel Reeves might be “lucky”.
IFS deputy director Ben Zaranko said otherwise she would face “an unenviable set of choices”, including Changes in how debt is calculated Free up more space; cut current spending plans; announce more tax hikes that could be conditional on changes in future years; or do nothing, violating her rules.
Economists Ruth Gregory and Hubert de Barochez of research firm Capital Economics also said UK government debt could be trapped in a “vicious cycle” , in which “Rising gilt yields are putting pressure on public finances, leading to calls for further tightening of fiscal policy.”
GBP to USD.
Bank of America Global Research strategists said on Friday that Labor was unlikely to break its rules and instead announce further fiscal consolidation measures – measures to reduce public debt, typically public spending cuts or tax increases – in the spring or earlier.
They added that this could be achieved through spending cuts, with Labor announcing a £40bn tax increase in October.
CNBC has reached out to the Treasury Department for comment.
UK stuck in ‘slow growth trap’ – but not a mini-budget crisis
Former British finance minister Vince Cable told CNBC on Friday that bond yields in many countries were rising and that this was not an “emergency panic situation” but that the market had realized that the United Kingdom had fallen into a “slow growth trap.”
“We’ve had a number of years since the financial crisis, and then Brexit, and then the issues with COVID-19 and the war in Ukraine, we’ve got relatively high inflation and very slow growth, so the market is pricing the UK lower. “Relatively speaking, this is not a panic situation or a crisis like an old balance of payments sell-off situation,” Cable said.
Labor should seek wider tax increases rather than focus on increasing national insurance. Cable said the move was fiercely criticized by the British business community. However, he added that there were broader concerns about UK growth and the global economic situation, which was clouded by external factors such as China’s weak outlook.
Cable also played down comparisons to Britain’s 2022 mini-budget crisis, when Prime Minister Liz Truss’ announcement of sweeping tax cuts triggered sharp swings in bond markets.
“A Truss moment is when a prime minister recklessly leaps into the dark and dramatically increases the budget deficit, assuming that will somehow spark economic growth. Well, that’s clearly not what happened this time. Argument yes “As to whether they’re doing enough austerity and whether they’re implementing them in the right way, but that’s a different kind of question,” Cable told CNBC.
This sentiment was echoed broadly in the broader analysis. Bank of America strategists called comparisons to the mini-budget “overblown” and noted that the bar for the Bank of England to intervene in gilt markets as it did then was high.
Capital Economics said that the rise in UK government bond yields last week was an economic headwind, but not a crisis. Its magnitude was smaller and slower than after the mini-budget was announced; David Brooks, director of policy at consulting firm Broadstone, said that liability-driven investment (LDI) There don’t appear to be any “systemic issues” with the fund, which is the biggest concern in 2022.
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