The UK’s long-term borrowing costs hit a new 27-year high as the government was forced to pay a premium on newly issued bonds over fears about the chancellor’s ability to rein in the public finances.
Yields on Britain’s 30-year debt rose by as much as 0.06 percentage points on Tuesday morning, hitting 5.7 per cent, the highest level since 1998.
Borrowing costs on two and ten-year bonds also jumped by 0.03 percentage points and the pound was on course for its worst day in three months as part of a synchronised selling of UK assets that reflects fears about the public finances before the autumn budget.
The sell-off in UK assets coincided with the Treasury’s latest gilt auction, which attracted record investor interest for a ten-year bond. The government will pay a premium of 0.082 percentage points over the existing benchmark to raise £14 billion in debt. Orders for the bond, maturing in 2035, exceeded £140 billion as investors rushed to lock in a decade of attractive returns.
Mark Dowding, chief investment officer at RBC BlueBay Asset Management, said rising borrowing costs and a weak currency “reflected concerns that further tax increases from already high levels could damage growth, add to inflation and still leave a sizeable hole in the public finances.
“Markets appear less focused on Treasury rhetoric and more on whether the government can present a credible plan to control spending.”
Investors also dumped US and European government bonds, with ten-year US Treasuries, a benchmark for the White House’s borrowing costs, the worst performers, gaining 0.06 percentage points.
• Long-term bonds pass pressure of higher yields on to governments
French bond yields were most affected on the Continent, gaining 0.05 percentage points before a vote of confidence in the government of François Bayrou next week. Bond yields rise when prices fall.
The pound slid by 1.3 per cent against the dollar to a three-week low of $1.34 and shed 0.7 per cent against the euro to €1.16. The dollar gained against most major trading currencies.
The climb in long-term gilt yields will put renewed pressure on the government, whose reshuffle of ministers in the Treasury and appointment of a new economic adviser for the prime minister have done little to quell worries about the sustainability of the UK’s public finances.
The debt to GDP ratio is close to 100 per cent and Rachel Reeves needs to find tens of billions of pounds from savings or tax rises to hit her fiscal rules in the budget. The 30-year gilt yield has risen by 0.6 percentage points since the start of the year and has become a proxy for worries about fiscal policy as short-term interest rates have fallen.
Sushil Wadhwani, a former rate-setter at the Bank of England, said the government needed to “change the image of the UK” in the eyes of international investors.
“The budget should raise revenue without hurting growth,” he wrote in The Guardian. “The Achilles’ heel of the 2024 budget was the rise in employer national insurance contributions, which was seen as hurting employment. It is therefore time to be bold and the government should engage in significant tax reform.”
Wadhwani said Reeves should consider a “land tax that could raise revenue and actually increase growth if taxes on work could thereby be reduced over time”.
Dowding said the climb in gilt yields this year was partly a result of the Bank of England selling bonds back to the market at the same time that new debt was being issued, yanking up supply in a fragile market. If the Bank paused its sales — a decision it is due to make on September 18 — this “could provide some technical relief and give the government more space to set out its strategy”.