Veriton Investment

UK 30-Year Bond Yields Climb to Highest Level Since 1998

(Bloomberg) -- The yield on long-dated UK bonds rose to the highest since 1998, putting pressure on Prime Minister Keir Starmer’s government to regain the confidence of investors who remain concerned over the fiscal outlook.

The rate on 30-year gilts rose five basis points to 5.69% on Tuesday amid a global decline in government bonds. The pound also tumbled in London trading, dropping 1.1% to $1.3395.

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Gilts are falling ahead of an autumn budget where Chancellor of the Exchequer Rachel Reeves is under pressure to find savings or raise taxes to improve the UK’s precarious fiscal position. That may prove politically difficult, given the government had to U-turn on welfare reforms after a rebellion among lawmakers.

“Tax rises are inevitable, but we are reaching a stage where further tax rises could become counterproductive,” said Mohit Kumar, chief European strategist at Jefferies International. “We remain negative on the UK long end and continue to favour steepeners along the curve.”

The selloff in long gilts reflects waning demand for such securities from traditional buyers such as defined-benefit pension funds, as well as concerns over structurally higher inflation. The UK’s Debt Management Office has already slashed sales of such securities to a record low, and some are calling for it to go even further.

Economists are predicting the UK will soon need to raise taxes to keep on the right side of the government’s self-imposed fiscal rules. Borrowing costs are a key determinant of the UK’s fiscal arithmetic — putting Reeves and Starmer at the mercy of bond yields.

Explainer: UK Tax Hikes Loom as Reeves Faces Budget Dilemma

Starmer announced a raft of changes to his Downing Street team on Monday in an a bid to reset the government and secure more influence over economic policy. The main fiscal rule is that day-to-day government spending should be covered by tax revenues within five years, so that borrowing is only for investment.

“The fiscal issues in the UK aren’t going away and rising yields into the budget are going to potentially take away the limited fiscal headroom Reeves has,” said Dominic Bunning, a strategist at Nomura. “The move in global long dated yields is in some ways more painful to the UK given the limited capacity.”

Truss Comparisons

The rise in borrowing costs has invited comparisons to the market meltdown under former Prime Minister Liz Truss.

Eurizon SLJ Capital chief executive Stephen Jen and Joana Freire wrote Friday that the the UK risks a “Starmer Moment” similar to the fallout from Truss’s mini-budget three years ago if the government fails to restore faith in the nation’s public finances.

To be sure, the current selloff is very different in nature.

While the 2022 rout saw forced selling that drove the 30-year yield up as much as 50 basis points in one session, the most recent rise has been a gradual grind upwards. It’s also not specific to the UK.

Still, UK bonds have been at the epicenter of the global slide in long-maturity debt. The rate on 30-year gilts has risen more than 100 basis points over the last 12 months, compared with around 80 basis points for comparable US Treasuries and German bonds.

Supply pressures may be weighing on gilts too. The UK is selling a new bond due 2035 via syndication Tuesday. The yield on 10-year notes was up four basis points at 4.79%.

--With assistance from James Hirai and Naomi Tajitsu.

(Updates prices, adds context throughout.)