‘UK in the drain’, a trader exclaimed earlier today as 30-year gilt yields punched through to their highest level since 1998. London stocks were down and the pound fell too. The message to trading desks was clear: dump Britain.
Things have worsened, at least in part, because yesterday’s Downing Street and Treasury reshuffle included no suggestions that the government has emergency plans to fix Britain’s broken fiscal maths and attempt to balance the books. And as I set out in last week’s cover story, markets are not amused.
Wherever you look on the yield curve, Britain’s debt is cementing itself as the most expensive in the developed world. Long-term debt – the 30-year gilt – was sold off en masse and passed 5.73 per cent. The 10-year gilt, which had stayed more stable this year, passed 4.8 per cent and reached its highest level since January.
But by mid-morning the message wasn’t just 'dump Britain'; it was 'dump everywhere else' too. The rise in yields was part of a global move against debt. Ten-year bonds rose across Europe and America, with significantly higher rises in Italy and Greece than those experienced in London. Longer-term debt was sold off across the globe too. But whether yield rises are driven by domestic factors or as part of global trends, it’s little comfort when our debt is already more expensive to service than anyone else's.
The underlying rise in Britain’s yields is at least obvious
The crucial moment will come in a few weeks when the Office for Budget Responsibility (OBR) settles its forecasts for the November Budget. If the ten-year gilt is significantly higher at that point than it was at the spring statement, then that will translate to billions Reeves needs to pull out from behind the Treasury sofa. A one percentage point rise in yields costs nearly £10 billion, according to the OBR.
Things are never simple, though, and some investors spied opportunity. In an auction of 10-year gilts which are due in 2035, the Treasury's debt management office managed to raise a record £14 billion. Some 60 per cent of the debt was bought by domestic UK buyers, with the rest sold overseas. The Treasury will be breathing an almighty sigh of relief that there is still such demand for British government debt. The hope will be that this demand leads to a drop in yields (which rise as the value of gilts fall).
However, if this increased demand for UK debt isn’t enough to lead to a drop in yields, then Rachel Reeves has almighty problems to overcome as she prepares her Autumn budget. Given we’re spending more than £105 billion a year servicing our debt, the continued uptick in yields does nothing but increase the black hole the Chancellor and Torsten Bell will have to fill with tax rises if they’re not prepared to consider spending cuts.
There’s confusion among investors and analysts alike about what exactly triggered today’s global selloff but the underlying rise in Britain’s yields at least is obvious: spending vast amounts more than we could ever hope to raise from taxes with a central Bank that is letting inflation run to double its target and a Chancellor flying so many kites that she’s found herself caught in a hurricane. The fact other countries now face that problem too should be no comfort to anyone.
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