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- Benchmark 10-year bond yield rises to high not seen since July
Government borrowing costs have hit their highest level since Labor came to power as global investors prepare for the Chancellor to unleash a £300bn borrowing glut.
In a blow to Rachel Reeves as she debates the final details of her first budget, the benchmark ten-year bond yield has risen to 4.29 per cent, a rate not seen since before the general election in July.
The yield is a key measure of how much the state has to pay investors who lend it money by buying bonds, packages of debt known as gilts in the UK.
The rate has risen from 3.75 per cent in mid-September amid concern in bond markets about the Chancellor’s borrowing plans and her decision to significantly relax debt rules.
Investors brace for Chancellor to unleash £300bn borrowing glut
Analysts at investment banks across the City expect the Treasury to announce plans to take on some £300bn of new debt this year by selling government bonds.
It would be the highest figure for any year apart from 2020-21, when the Government issued £485 billion to fund Covid-19 emergency plans and the Bank of England was a major buyer.
City insiders said the Chancellor’s plans were causing jitters in bond markets, with the panic caused by then-first minister Liz Truss’s mini-Budget two years ago still fresh in memory. Citi analysts said “the risk to gilts is far from over.”
Rising yields translate into higher borrowing costs for millions of households and businesses as mortgages and loans become more expensive.
Danni Hewson, head of financial analysis at brokerage AJ Bell, said: “The Labor Party has promised to be a party that supports British business, but the wait for this first Reeves Budget has felt like death by a thousand cuts.”
‘Confidence has been eroded and markets have already moved in favor of the Treasury with borrowing costs rising.
“No one has forgotten the gold sell-off that sent markets into a tailspin following Liz Truss’ disastrous mini-budget.”
While ten-year British bond yields are above 4.2 percent, the equivalent rate in Germany is around 2.2 percent.
The gap is the highest in more than a year.
Analysts said this reflected both jitters ahead of the Budget and the prospect that interest rates will be cut faster in the eurozone than in Britain. George Buckley, economist at investment bank Nomura, said: “Not only is the European Central Bank likely to cut rates more quickly than the Bank of England, but there is caution about what the budget could mean and how flexible it is.” will be.” could allow the Budget to be.’
Post-Covid, bond issuance fell to £170 billion in 2022-23 before rising again to £239 billion last year.
In April, the Treasury forecast an extra £278bn for this year. But this figure seems too conservative, with Nomura expecting up to £315bn this year. Moyeen Islam, a strategist at Barclays, said the need to issue between £250bn and £270bn a year was “becoming the norm”.
Adam Dent, strategist at Santander, added: “The public debt market is nervous about the potential strong increase. We are going to have high bond issuance for many more years.”
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