UK’s Long-Term Borrowing Costs Soar, Piling Pressure on Chancellor
The UK’s long-term borrowing costs have surged to near-record highs, putting Chancellor Rachel Reeves under intense pressure to maintain market confidence ahead of a series of bond sales this week. The yield on 30-year gilts has risen to 5.19%, nearing the 5.21% peak of 2023 and levels last seen in the late 1990s.
Debt Concerns Mount
Britain is in the spotlight as investors worry about the country’s growing debt pile, following the Labour government’s announcement of a near-record slate of borrowing in October’s budget. This has reignited concerns about the country’s fiscal sustainability. The benchmark 10-year yield has jumped about 40 basis points since late October, reflecting the market’s unease.
Tightrope Act
Reeves is walking a tightrope, trying to balance the need to keep debt investors on side while dispelling the memory of former Conservative Prime Minister Liz Truss’ disastrous mini-budget of 2022. The Chancellor received a warning from bond vigilantes in October when yields surged in response to the prospect of bigger debt auctions.
Fiscal Rules Under Pressure
Reeves’ main fiscal rule, which prohibits borrowing for day-to-day spending in 2029-30, may come under increasing pressure. With only £9.9 billion of headroom, the Chancellor is facing a daunting task. Should the Office for Budget Responsibility refresh its medium-term fiscal projections, Reeves may be forced to breach her own revised fiscal rules.
Bond Sales Loom
Investors are preparing to absorb as much as £6.5 billion combined of five and 30-year gilts this week through auctions from the UK Debt Management Office. This is in addition to a Bank of England operation to reduce its balance sheet via the sale of securities in the seven- to 20-year bucket. Tuesday’s 30-year debt offering is set to be the first with an average yield above 5% since Gordon Brown was chancellor.
Headwinds Ahead
Further headwinds to gilts come from traders paring bets on interest-rate cuts from the Bank of England this year. Money markets are fully pricing just two quarter-point reductions, down from more than three at the start of last month. The pain of higher borrowing costs is also being felt by UK homeowners, with November mortgage approvals falling to the lowest level since August.
Housing Market Impact
The government’s plans to deliver 1.5 million new homes over five years are being crimped by the decline in mortgage approvals. The housing market is feeling the pinch of higher borrowing costs, adding to the pressure on Reeves to keep the market on side.
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