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UK bond yields have risen since the Labor government took office debut budget plan in October sparked widespread concern last week as borrowing costs rose to breach multiple decade highs.
The possibility of further cuts in public spending or tax increases came into focus last week 30 years of gold profits hit Level from 1998 onwards. Although it initially fell after Labor’s election victory in July, 2 year old gilded yields have also risen above 4.5%, and the 10-year yield has reached levels not seen since 2008.
The fall in UK investor confidence was particularly highlighted by the simultaneous fall in sterling, which on Friday hit its lowest level against the US dollar since November 2023.
Borrowing costs are also rising euro area and has USAand as economists have pointed out, the UK is affected by external factors, including the return of Donald Trump to the White House and expectations of higher-than-expected broad interest rates this year.
But the rise in UK yields is nevertheless a major headache for the UK government, which has pledged to do so. restart economic growth ensuring that within five years the debt will fall as a share of the economy. UK public sector net debt today it stands at almost 100% of GDP.
“The rise in gold yields has a feedback loop that is reinforced by UK debt sustainability, increasing borrowing costs used for budgets,” ING European rates strategist Michiel Tukker said in a note on Friday.
Tukker cited a study by the independent Office for Budget Responsibility, which indicated that the recent rise in yields – if sustained – would erase the government’s 9.9 billion pound ($12.1 billion) shortfall. self-declared fiscal rules. These regulations commit workers to cover their day-to-day spending with income, as well as the longer-term goal of reducing the UK’s debt-to-GDP ratio.
The Institute for Fiscal Studies think tank said on Friday there was a “knife edge” to the UK’s chance of achieving the former fiscal rule, but Chancellor Rachel Reeves “could be lucky”.
Otherwise, it faces an “unenviable choice”, said IFS associate director Ben Zaranko, including getting ahead of the next. changes in how the debt is calculated to release a bigger head, reducing current spending plans and announcing more tax increases, which may be subject to change in the coming years. The minister could also do nothing and break his rule.
Economists Ruth Gregory and Hubert de Barochez of research group Capital Economics also said UK gilts could be caught in a “vicious circle” where “rising UK yields are putting a strain on public finances, thus requiring increased tax policy, but at the same time putting additional strain on the economy.”
Pound vs dollar.
Bank of America Global Research strategists said on Friday that it was unlikely that Labor would break its rules and instead announce further fiscal consolidation – measures to reduce public debt, generally through cuts in public spending or tax increases – in the spring or earlier.
This would potentially be achieved through spending cuts, they added, coming from behind £40bn in tax rises Labor announced in October.
A Treasury spokesman told CNBC: “This government’s commitment to fiscal rules and sound public finances is non-negotiable.”
“The chancellor has already shown that tough decisions on spending will be made, with a review of spending to root out waste. And in the coming weeks and months, the chancellor will leave no stone unturned to make a decision to fight for economic growth and workers.”
UK in a ‘slow growth trap’ but not in a budget crisis
Vince Cable, the former UK finance minister, told CNBC on Friday that many countries were seeing higher bond yields and that it was not an “emergency panic situation”, but that markets had realized Britain was in a “slow growth trap”.
“We’ve been there for many years, since the Financial Crisis, Brexit, then a problem with Covid(-19) and the war in Ukraine, and we’ve been left with quite high inflation, very slow growth, and so there are markets. The UK going down, quite speaking, but this is not a state of panic, not a crisis of the old balance of payments situation,” Cable said.
Labor should support a wider tax increase rather than focusing on an increase in National Insurance – payroll tax. It was frustrated by the UK business communitysaid Cable. However, he added that the market has wider concerns about UK growth and the global economic picture, which is clouded by external factors such as a weaker outlook for China.
Cable also underestimated them The UK budget crisis in 2022when Prime Minister Liz Truss announced major tax cuts it caused a lot of volatility in the bond market.
“The Truss moment was when the Prime Minister took a reckless leap into the dark with a big increase in the budget deficit, hoping that would somehow affect economic growth. Well, that’s clearly not what happened this time. It’s an argument. Whether they’ve tightened enough and whether they’ve done it in the right way , but it’s a different kind of problem,” Cable told CNBC.
This sentiment was reflected in the broader analyses. Bank of America strategists dismissed the comparisons with the small budget as “exaggerated”, noting that the threshold for the Bank of England to intervene in the gilt market, as it did at the time, was high.
Capital Economics said last week’s higher gilt yields were a headwind, but not a crisis, with smaller and slower moves than after the small budget. David Brooks, head of policy at consultancy Broadstone, said there were no “systemic issues at play”. liability driven investment (LDI) funds, which were the biggest concern in 2022.
