Why rising
bond yields
are rattling
Rachel Reeves
Why rising bond yields are rattling Rachel Reeves
Chancellor• Образование » Высшее образование » Высшее учебное заведение » Канцлер (образование) in danger of breaking fiscal rules after cost of servicing UK
10-year debt rises to highest level since 2008
Richard Partington Economics correspondent
Wed 8 Jan 2025 16.31 GMT Last modified on Wed 8 Jan 2025 16.33 GMT
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Rachel Reeves has a bond market headache. After a rise in the government’s
borrowing costs, with the 10-year cost of debt hitting the highest level since
2008, the chancellor• Образование » Высшее образование » Высшее учебное заведение » Канцлер (образование) is in danger of breaking her fiscal rules.
For the past 15 years, western governments had been able to rely on the
financial markets for cheap borrowing. After the 2008 financial crisis• Финансовый кризис the
world’s most powerful central banks cut interest rates close to zero, while
inflation• Экономика » Финансы » Инфляция
• Экономика » Макроэкономика » Макроэкономические индикаторы » Инфляция remained low, with the idea to help reboot economic activity.
In the years since the peak of the Covid• Медицина » Эпидемиология » Инфекционные заболевания » Вирусология » Вирусы » Коронавирусы
• Медицина » Заболевания » Инфекционные заболевания » Вирусология » Вирусы » Коронавирусы pandemic• Медицина » Эпидемиология » Пандемия, those trends are now firmly
in reverse with serious consequences for governments worldwide. Here we
explain how the bond market is rattling the chancellor• Образование » Высшее образование » Высшее учебное заведение » Канцлер (образование).
Why are bond yields rising?
Government borrowing costs have risen worldwide as investors weigh up the
prospects of stubbornly high inflation• Экономика » Финансы » Инфляция
• Экономика » Макроэкономика » Макроэкономические индикаторы » Инфляция forcing central banks to hold back from
cutting interest rates by as much as previously hoped.
Inflation• Экономика » Финансы » Инфляция
• Экономика » Макроэкономика » Макроэкономические индикаторы » Инфляция skyrocketed after the exit from Covid• Медицина » Эпидемиология » Инфекционные заболевания » Вирусология » Вирусы » Коронавирусы
• Медицина » Заболевания » Инфекционные заболевания » Вирусология » Вирусы » Коронавирусы lockdowns and the energy shock
triggered by Russia’s war in Ukraine, leading central banks to drive up
interest rates in an attempt to bring it back to target.
Inflation• Экономика » Финансы » Инфляция
• Экономика » Макроэкономика » Макроэкономические индикаторы » Инфляция has cooled over the past year, leading central banks to cut rates.
But inflationary pressures have appeared more persistent than previously hoped
in recent months – limiting the scope for further cuts.
Is Britain alone?
Part of the problem in the UK is domestic: the resilience of wage growth,
service sector prices, and fears the new Labour government’s tax and spending
measures could stoke inflation• Экономика » Финансы » Инфляция
• Экономика » Макроэкономика » Макроэкономические индикаторы » Инфляция.
However, there is also a global dimension: investors fear Donald Trump’s
tariff proposals could also fuel inflation• Экономика » Финансы » Инфляция
• Экономика » Макроэкономика » Макроэкономические индикаторы » Инфляция , forcing the US Federal Reserve• Экономика » Экономика США » Макроэкономика США » Федеральная резервная система США
• Объект организация » Организации по алфавиту » Организации на Фе » Федеральная резервная система США
• Соединённые Штаты Америки (США) » Экономика США » Макроэкономика США » Федеральная резервная система США to
keep interest rates higher for longer. Trump’s tax-cutting plans could also
drive up the national debt, adding to the supply of US• Экономика » Финансы » Платежные средства » Доллар США Treasury bonds.
City analysts point to rising borrowing costs across developed markets.
“People often think of the UK as being a market that behaves somewhere in the
middle of the US• Экономика » Финансы » Платежные средства » Доллар США and the eurozone,” said Mark Capleton, an analyst at Bank of
America• Экономика » Экономика США » Банки США » Bank of America
• Экономика » Финансы » Банк » Банки США » Bank of America
• Объект организация » Организации по алфавиту » Организации на Ba » Bank of America
• Соединённые Штаты Америки (США) » Экономика США » Банки США » Bank of America.
“For 10-year yields over the past three months, the US• Экономика » Финансы » Платежные средства » Доллар США is up 65 basis points,
the UK up 46 basis points and Germany is up 22 basis points. So the UK is
somewhere in the middle.”
Bond yields graphic
Is this Liz Truss 2.0?
Some investors are warning the government has added to its bond market woes.
Economic growth has flatlined since Labour came to power in July, in part
driven by depressed consumer and business• Экономика » Бизнес confidence after Reeves warned that
large tax rises were needed to fix the dire inheritance left by the
Conservatives.
Investors also fear her autumn budget could add to inflationary pressures;
particularly the increase in employer national insurance contributions , which
is projected to raise £25m in this parliament, and the rising minimum wage
from April.
The Treasury is preparing to sell about £300bn of bonds this year to refinance
maturing debts and to cover the annual budget deficit – a historically
substantial sum. The Bank of England is also adding about £100bn more to the
supply of gilts as it winds down its quantitative easing scheme. This reverses
its position of recent years, when it had been among the largest buyers.
Yields have risen above the peak seen after Liz Truss’s 2022 mini-budget.
Still, the situation is markedly different.
Back then, the UK stood out on the international stage for both the speed of
the increase in borrowing costs and the peak they reached – leading some
analysts to talk of a “ moron premium ” for Britain.
Truss’s mini-budget triggered a rapid shift in markets, rattling the pensions
industry and forcing the Bank of England to intervene . However, the recent
increase has taken place over a longer timeframe, which is more manageable for
investors to adapt to.
Why does this cause a problem for government finances?
A sustained rise in borrowing costs could wipe out Reeves’s headroom against
her fiscal rules when she presents her “spring forecast” on 26 March.
At the autumn budget, the Office for Budget Responsibility forecast that the
chancellor• Образование » Высшее образование » Высшее учебное заведение » Канцлер (образование)’s main rule to balance day-to-day spending with tax receipts by
2029-30 would be met with £9.9bn to spare.
With a national debt totalling £2.6tn, almost equal to the annual output of
the economy, the OBR reckoned the government would need to spend about
£104.9bn to service its debts in the current financial year – a sum worth more
than the annual education• Образование » Высшее образование » Высшее учебное заведение » Канцлер (образование) budget – rising to £122.2bn by the end of the
decade.
However, weaker growth, stickier inflation• Экономика » Финансы » Инфляция
• Экономика » Макроэкономика » Макроэкономические индикаторы » Инфляция, a higher Bank rate and long-term
borrowing costs than expected in October could lead the Treasury watchdog to
revise up its forecasts for debt servicing costs when it presents its March
update.
Economists reckon the OBR could scrub out all of the £9.9bn headroom Reeves
had in reserve.
What are the chancellor• Образование » Высшее образование » Высшее учебное заведение » Канцлер (образование)’s options?
Reeves’s 26 March spring forecast had been expected not to include any tax and
spending changes, with the chancellor• Образование » Высшее образование » Высшее учебное заведение » Канцлер (образование) preferring one big fiscal event a year
to give families and businesses more stability.
However, she would be unlikely to allow a damning OBR verdict without any
corrective action.
Reeves has though created something of a triple lock for herself; with a
primary commitment not to break her fiscal rules, but also not to further
increase taxes, and to meet Labour’s pledge of no return to austerity.
“The risk is, having been seen to haveU-turned on tax between the July
election and the October budget, Chancellor• Образование » Высшее образование » Высшее учебное заведение » Канцлер (образование) Reeves faces a credibility problem
with financial markets,” said Simon French, an economist at Panmure Liberum.
The Treasury has insisted the fiscal rules are non-negotiable, signalling that
any adjustments would come through spending cuts. This could pave the way for
fresh measures in March and a tight spending review expected before June, but
it would also cause fresh headaches for Labour; having been elected on a
promise to fix battered public services and drive up living standards.
Reeves could, though, still catch a lucky break.
Some City analysts reckon financial markets have overreacted to the
challenging economic and fiscal outlook. The OBR has yet to capture the
financial market data used in its forecasts and will do so closer to 26 March
– leaving some time for conditions to subside.
Financial markets are pricing in two quarter-point interest rate cuts from the
Bank of England this year. However, many analysts, including at Bank of
America• Экономика » Экономика США » Банки США » Bank of America
• Экономика » Финансы » Банк » Банки США » Bank of America
• Объект организация » Организации по алфавиту » Организации на Ba » Bank of America
• Соединённые Штаты Америки (США) » Экономика США » Банки США » Bank of America and Goldman Sachs• Объект организация » Организации по алфавиту » Организации на Go » Goldman Sachs, expect a weaker economic outlook could lead
Threadneedle Street to cut borrowing costs four times in 2025.
“The market has taken out too many rate cuts we think,” said Capleton. “We do
think the Bank will manage to achieve quarterly rate cuts of quarter percent a
time. That will help the situation; we think gilts are somewhat oversold
here.”
