UK 10-year borrowing costs hit highest level since 2008

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UK 10-year borrowing costs on Wednesday rose to the highest level since the global financial crisis as a bond sell-off intensified, threatening the Labour government’s ability to meet its self-imposed budget rules.

The 10-year gilt yield climbed as much as 0.12 percentage points to 4.8 per cent in late-morning trade — its highest level since October 2008, according to Bloomberg data. Yields move inversely to prices.

The yield on the 30-year gilt — which on Tuesday rose to its highest level since 1998 — also continued to climb, touching 5.36 per cent. Investor anxiety over higher UK borrowing, weak growth and stubbornly high inflation has fuelled a sell-off since October’s Budget.

Sterling, meanwhile, fell 1.1 per cent against the dollar to $1.233, its weakest level since April.

Chancellor Rachel Reeves left herself a slender £9.9bn of headroom against her revised fiscal rules in the Budget even after announcing a £40bn tax-raising package that aimed to “wipe the slate clean” on the public finances.

Since then, increases in government debt yields have put that budgetary wiggle-room under threat. The level of bond yields is an important determinant of the budget headroom given its implications for the government’s interest bill, which exceeds £100bn a year.

The latest increase in rates on Wednesday means the chancellor’s headroom against the current budget rule has now been wiped out, according to Ruth Gregory at Capital Economics. 

If the higher yields are sustained, it could force the chancellor to announce corrective action to keep budget policy on track. On March 26 the Office for Budget Responsibility announces a new set of fiscal forecasts that will factor in bond yield movements.

“If bond yields rise further, Reeves may be forced to make the economically damaging decision of further increasing taxes or cutting back on planned public spending to balance the books,” said Kallum Pickering, chief economist at Peel Hunt.

The chancellor has pledged to make significant tax changes only once a year, in a single “fiscal event”. The next of these is not expected until the autumn.

The recent gilt market slump comes after weeks of climbing yields on longer-dated US Treasuries and German Bunds, though Wednesday’s sell-off was most acute in the UK. 

“When we’re in a bear market for bonds generally, the UK tends to underperform,” said Kit Juckes, a strategist at Société Générale. “The gilt market behaves these days like it’s less deep than other bond markets.”