UK bond market sell-off deepens and pound falls

Open Editor’s Digest for free

Rula Khalaf, editor of the Financial Times, picks her favorite stories in this weekly newsletter.

UK 10-year borrowing costs rose further on Thursday as the bond market sell-off deepened, hammering the pound and threatening to derail the Labor government’s fiscal plans.

The yield on 10-year Treasury bonds rose as much as 0.12 percentage points to 4.93 percent in early trading, the highest level since 2008, before falling again to 4.84 percent.

The pound rose again amid the sell-off, falling 0.6 percent against the dollar to $1.229, its weakest level since November 2023.

UK borrowing costs have risen sharply as investors worry about the government’s large borrowing needs and the growing threat of stagflation, which combines weak growth with persistent price pressures.

“The economy is entering a stagflation phase,” said Mark Dowding, chief investment officer at RBC BlueBay Asset Management.

The pound sterling was also affected by the rise in the dollar after a series of recent US data that strengthened investor confidence in the world’s largest economy.

“The sales process in [the pound] “Bonds and bonds reflect a deterioration in the UK’s financial outlook,” analysts at Brown Brothers Harriman said.

The dollar index, which measures the currency against a basket of six others, rose 0.1 percent on Thursday.

Chancellor Rachel Reeves has left herself a slim margin of £9.9bn against her revised fiscal rules in the Budget even after announcing a £40bn tax rise package aimed at “wiping the slate clean” from the public finances.

Since then, increases in government debt yields have put budget room for maneuver under threat. The level of bond yields is an important factor in determining the budget ceiling due to its effects on the government’s interest bill, which exceeds 100 billion pounds annually.

The government bond market could suffer another bout of selling on Friday if closely watched U.S. jobs data pushes U.S. Treasury yields higher, dragging bonds with them, analysts said.

“It could get very bleak for bonds if we see strong payrolls,” said Pooja Kumra, UK interest rate strategist at TD Securities.

The simultaneous sell-off in gold and sterling carries echoes of the reaction sparked by Liz Truss’s “mini” budget in 2022, analysts said.

But many investors believe the situation is somewhat worse than the bond crisis three years ago.

“I expect things will start to bottom out… The pullback has already happened in government bonds in the last year,” said Jeffrey Yu, a senior strategist at the Bank of New York. “I’m not denying that there are problems in the UK, but taking action “Suddenly compared to 2022, I think that moves things forward.”