The cost of Government borrowing has surged in recent days, which has knocked the pound and dealt a blow to Chancellor Rachel Reeves.
Yields on UK Government bonds – known as gilts – have jumped to levels not seen for decades amid worries over high Government borrowing and the economic outlook.
This has had a knock-on effect on the pound, which has fallen to its lowest level against the US dollar for over a year.
Some experts have said the sell-off in bond markets is an unwelcome echo of the market chaos caused by the “mini budget” under former prime minister Liz Truss in 2022.
Here we look at what is happening with gilts and why this is bad news for the Labour Government:
– What are bonds and bond yields?
Bonds are loans that investors make to a bond issuer and can be issued by companies or governments to raise money.
The yield on a bond is the amount of money an investor receives for owning the debt and is represented as a percentage of its price. When a bond price falls, its yield rises.
Yields rise when investors are less willing to own the debt, meaning they will pay a lower price for the bonds.
– Why are bond yields rising?
The yield on long-term 30-year gilts have jumped to their highest level since 1998, while 10-year gilts have also risen to highs not seen since the 2008 financial crisis.
The rout has been sparked by concerns over Britain’s extra borrowing and the rising threat of “stagflation”, where the economy is weighed down by rising inflation and stalling growth.
Globally, there has also been a wider sell-off in government bonds in recent months in the face of worries that US President-elect Donald Trump could introduce a tariff policy which would be inflationary for many international economies.
US treasury yields have also been moving firmly higher after reports of resilience in the US economy have cast doubts over expectations for further cuts to interest rates.
The woes in the UK have been compounded by concerns over the knock-on effect in the economy of Labour’s recent budget measures, with fears that moves to hike wage costs for companies will lead to higher prices and stifle growth.
– Why are rising bond yields bad for the Government?
The yield on gilts is a proxy for the effective interest rate on public borrowing – meaning that rising yields equal higher borrowing costs.
It has also threatened to derail Labour’s fiscal plans, with economists warning that the Chancellor could be forced into further tax hikes or cuts to spending plans to meet UK fiscal rules after the jump in Government borrowing costs.
