Borrowing costs surge as gilts close in on 27-year low
Long-dated gilts plunged to a near 27-year low on Tuesday, bringing the UK’s fragile fiscal position into even sharper relief in the run-up to the government’s second Budget this Autumn.
The yield on 30-year UK government bonds, which moves inversely to the price, jumped by as much as nine basis points to 5.63 per cent, after a slew of international news compounded the already-existing reservations held by international investors about the UK’s economic outlook.
On Monday, Donald Trump announced plans to oust Federal Reserve governor Lisa Cook, alleging she had made false statements on historic mortgage agreements.
The unprecedented move – Trump’s latest and most extreme salvo in a long-running string of attacks on the central bank – triggered a sharp sell-off in US government bonds, as traders dialled back bets on a government-influenced Fed’s appetite to bring inflation to heel in America.
Long-dated US government bonds, known as Treasuries, were subject to the sharpest reductions, with the 30-year Treasury yield jumping by 0.06 per cent on Tuesday.
“The question for markets right now is about the September meeting but be in no doubt that we are witnessing a regime shift like we have not seen in decades,” said Neil Wilson, investor strategist at Saxo Markets.
Political uncertainty compounds sell-off in gilts
Meanwhile, France faces losing yet another Prime Minister, after under-fire Francois Bayrou triggered a vote of confidence in his party in the face of splintering opposition party support for his austerity-lite Budget.
The announcement from the leader of the French parliament, who has only been in post since December 2024, compounded global jitters, and sparked its own fire-sale of French bonds and equities that infected major asset classes across Europe.
But the sell-off will be a particular headache to the UK government, which already faces the highest borrowing costs of any G7 country as it pulls together plans for its second major fiscal event in the autumn.
The yield on 30-year gilts – a traditionally popular bond among long-term investors like pension funds – would need to climb to by just three more basis points to reach an interest rate not seen since 1998.
Were borrowing costs to remain at such elevated levels, the Chancellor will be left with even less room for manoeuvre against her self-imposed fiscal rules.
Economists are predicting Rachel Reeves will have to hike taxes by between £10bn and £50bn as a result of a combination of costly government U-turns and higher borrowing costs eating into Britain’s public finances.
After the National Health Service and welfare, debt interest is now the third-largest ongoing cost for the UK government, which now spends more than twice as much paying interest on its debt than on its defence.