Michelle Thompson- On Tuesday, the yield on 30-year Gilts, a U.K. government bond, surged to its highest level since 1998.
- Yields on shorter-term U.K. government bonds also increased.
- An analyst told that economic uncertainties were reducing investor interest in U.K. debt.
U.K. borrowing costs increased on Tuesday following an auction of 30-year Treasury gilts, which pushed yields on these long-term bonds to their highest levels in nearly 30 years.
By 2:02 p.m. London time, the yield on the 30-year gilt rose by 3 basis points to 5.212%, marking its highest point since the late 1990s. This came after the U.K. Debt Management Office sold £2.25 billion ($2.83 billion) of 30-year gilts with a 4.375% coupon, at a minimum yield of 5.194%, reflecting a discount on the bond’s face value.
Yields on 20-year gilts also rose by 3 basis points to 5.153%. Additionally, yields on shorter-term gilts increased, with the 10-year gilt gaining 3 basis points to reach 4.641%, while the 2-year and 5-year gilts saw slight increases in the afternoon.
‘Stagflation’ Concerns
Susannah Streeter, head of money and markets at Hargreaves Lansdown, explained on Tuesday that the British bond market is being influenced by both domestic and global uncertainties.
Traders are concerned about potential inflationary effects from U.S. President-elect Donald Trump’s tariff plans, which could push up the dollar, U.S. interest rates, and consumer prices, affecting global markets.
Domestically, the U.K. economy unexpectedly contracted by 0.1% in October, and inflation remains above the Bank of England’s 2% target, rising to 2.6% in November. Additionally, there are ongoing concerns about the Labour government’s fiscal policies, including a proposed £40 billion ($50.1 billion) tax increase, which includes a hike in employer National Insurance contributions. This has led businesses to worry about the impact on hiring.
The British Chambers of Commerce reported on Monday that business confidence has fallen to its lowest point since the 2022 “mini-budget” crisis, with firms citing rising tax and wage costs as major concerns.
Streeter noted that there is growing worry in the U.K. about stagflation, as inflation continues to rise, pay growth remains strong, and the economy stagnates. This uncertainty has dampened demand for long-term U.K. government debt.
Richard Carter, head of fixed interest at Quilter Cheviot, pointed out that rising gilt yields are problematic for the government, raising fears about the state of public finances. He also highlighted the cautious stance of the Bank of England on cutting interest rates too sharply. Despite this, he sees gilt yields as an attractive option for long-term investors, as they are higher than expected inflation. For those with a lower risk tolerance, short-term gilts remain a viable investment choice, being less vulnerable to market fluctuations.
Emily Martinez
