Reeves feels the pinch as bond yields squeeze spending room

The yield on 30-year government debt briefly rose to 5.64% in early trading on Wednesday. That put it just below a level last reached in 1998. However, 10-year gilt yields, arguably a more reliable marker of long-term borrowing costs, stood at 4.74% on Wednesday, below the 16-year high of 4.93% reached in January.

Bond yields rise as bond prices fall – and yields on bonds determine how much the government will have to pay when it next issues bonds. So the long-term cost of borrowing for the UK government is now higher.

Yields began to rise after Donald Trump’s attempt on Monday to oust Lisa Cook, a sitting US Federal Reserve governor. That raised questions over the future of the Fed’s independence, and spooked investors.

Longer-dated UK debt tends to be vulnerable to global factors such as Trump’s interference at the Fed. The rise in UK gilt yields was a knock-on effect “in line with US Treasury yields”, which also climbed this week, said Alex Kerr of Capital Economics. Yields on long-dated government bonds from other major economies, including France, Germany and Japan, also climbed.

But even before last Monday, higher-than-expected UK inflation was putting upward pressure on gilt yields. Consumer price inflation rose to 3.8% in July, almost double the Bank of England’s 2% target.

The chancellor, Rachel Reeves, is facing calls to address a budget deficit which, according to figures from the Office for National Statistics, climbed to £42.8bn in the year to July.

Kerr said if the rise in long-dated gilt yields is sustained, Reeves’s fiscal headroom – the scope she has to spend or cut taxes without breaking her borrowing rules – could drop from £9.9bn at her spring statement in March to £5.3bn.

“The big issue is that the public finances are on a pretty poor trajectory because you’ve got low economic growth and high interest rates,” he added.

Photograph by Justin Ng/Alamy