Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
A UK Treasury minister has been forced to take questions from MPs about the tumult in UK bond markets as British government borrowing costs hit their highest level since the financial crisis.
Sir Lindsay Hoyle, Speaker of the House of Commons, said he had accepted an urgent question for UK chancellor Rachel Reeves from the Conservative opposition about the “growing pressure of borrowing costs on the public finances”.
Hoyle’s ruling that a Treasury minister should appear in parliament on Thursday morning came as the 10-year gilt yield rose as much as 0.12 percentage points to 4.93 per cent in early trading, the highest level since 2008. It later eased back to 4.86 per cent.
Reeves, who is about to leave for a long scheduled trip to China, dispatched her deputy Darren Jones to answer the questions.
The pound was swept up in the sell-off, dropping as much as 1 per cent against the dollar to $1.224, its weakest level since November 2023, and was recently trading at $1.227.
The rising yield on UK government debt poses a major challenge to Reeves’ plans, as it threatens to wipe out the government’s room for extra borrowing under its budget rules.
Reeves’ key fiscal rule is a promise to fund all day-to-day public spending with tax receipts by 2029-30.
The recent bond market strains raise the spectre of tax rises or spending cuts. The Treasury has signalled that it would reduce expenditure rather than increase taxes.
UK borrowing costs have risen sharply as investors worry about the government’s heavy borrowing needs and the growing threat of stagflation, which combines lacklustre growth with persistent price pressures.
“The economy is entering stagflation,” said Mark Dowding, chief investment officer at RBC BlueBay Asset Management.
Sterling has also been hurt by a resurgent dollar as a string of recent US data has bolstered investor confidence in the world’s largest economy.
“The sell-off in [the pound] and gilts reflect a deterioration in the UK’s fiscal prospects,” said analysts at Brown Brothers Harriman.
The dollar index, which measures the currency against a basket of six others, was up 0.1 per cent on Thursday.
Reeves left herself a slender £9.9bn of headroom against her revised fiscal rules in last year’s autumn Budget even after announcing a £40bn tax-raising package that aimed to “wipe the slate clean” on public finances.
Increases in government debt yields have since put that budgetary wriggle 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 gilts market could suffer another bout of selling on Friday, analysts said, if closely watched jobs data in the US was to push yields higher on US Treasuries, dragging gilts with them.
“It can turn extremely grim for gilts if we see a strong payroll,” said Pooja Kumra, a UK rates strategist at TD Securities.
Analysts have said the simultaneous sell-off of gilts and the pound carried echoes of the reaction triggered by the “mini” Budget of Liz Truss in 2022.
But many investors think the situation is short of the 2022 gilts crisis.
“I do anticipate things to start bottoming out . . . On gilts the washout already happened last year,” said Geoffrey Yu, a senior strategist at BNY. “I’m not denying there are issues in the UK, but to suddenly draw comparisons to 2022, I think that is pushing things.”
