There are many concerns about UK gold yields and the health of the economy, but this is not Liz Truss' moment | Money News

How worried should Rachel Reeves be that Treasury yields have risen to their highest level in 25 years?

More importantly, how worried should the rest of us be about it?

After all, the yield on 30-year government bonds (aka gilts) is today at 5.37%, the highest since 1998. The benchmark 10-year maturity government bond interest rate is also at its highest level since 1998. 2008.

Higher government borrowing rates mean all the investments Keir Starmer has promised over the next few years will cost more. And because these interest rates reflect long-term expectations about the cost of borrowing, in practice this means that everything else in this economy becomes increasingly more expensive.

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All of this has short-term and long-term consequences. In the short term, this means it will become more difficult for Mr Reeves to meet the financial rules he has set. Going back to the budget, she left a paper-thin margin (in fiscal terms) of £9.9 billion to avoid over-borrowing compared to the new rules.

According to Capital Economics, recent market movements suggest this margin may now have shrunk to around £1 billion.

And given that that was before the Office for Budget Responsibility (OBR) had even decided to change its forecasts, it will now be decided whether Mr Reeves will comply with the fiscal rules. As a result, the Treasury is prepared to scale back its spending plans for the next few years, as my colleague Sam Coates reported this week. It's a depressing prospect considering the Prime Minister just set it up. However, this will not become clear until the OBR's updated forecasts are published in March.

But fiscal rules and political embarrassment are one thing, the bigger picture is another. And the bigger picture is that international investors are charging the UK higher interest rates to compensate for concerns about its economic future, including rising debt levels, the threat of rising inflation and fears of slow growth in the coming years. will come

How does it compare to the Liz Truss mini budget?

But perhaps the biggest question is whether the fact that long-term bond yields are currently higher (more than 5.2%) than their October 2022 peak following the infamous mini-budget (4.8%) means that the economy will: Are we on the brink of something much bigger than the Liz Truss era?

The short answer is no. It is completely different from the post-mini-budget aftermath. Investors are concerned about UK debt levels. Yes. They are repricing our debt accordingly. There were moments in the days after the Budget was passed last autumn when UK bond yields rose more than most bond yields, behaving in an erratic and worrying way.

But this is the most important part. We have seen nothing like the level of panic and concern we saw in the markets following the mini-budget. But just don't take it from me. Consider two data-driven metrics that can be very useful in this case:

The first is to consider that it wasn't just Treasury yields that rose in October 2022. At the same time, the pound plummeted. This is a sign that investors are simply taking their money out of the country. This time the pound is fairly stable and much stronger than it was at the end of 2022, when it reached its lowest level in modern history (relative to a basket of currencies).

Is this only a UK problem?

The second test asks questions like: Is Britain an outlier? Are investors looking at this country and treating it differently than other countries?

And here again came a somewhat reassuring answer to Mr. Reeves. It's clear that UK government bond yields have risen sharply in recent weeks, but so have US government bond yields. Yields in Germany have also risen in recent weeks, although not as high as in the US or UK.

That said, the movement in bond yields appears not to be limited to the UK. This is part of a larger movement across assets around the world as investors face a new future. Governments (including the UK and US under Donald Trump) are willing to borrow more and spend more in the future. As I said, that's somewhat reassuring for Ms Reeves, but I'm not sure it's completely reassuring for the rest of us.

One way to look at this is to measure how far UK bond yields have deviated from their US and German cousins ​​in recent months. And while there was a point in the days after Reeves' Halloween Budget when UK bond yields were closer to outliers than they have historically been following fiscal events, over the next few weeks the UK was no longer an outlier. Yes, more was charged by investors, but that's not surprising considering the budget included massive spending and increased borrowing.

Now compare that to what happened after the mini-budget. UK bond yields have differed more from those of the US and Germany than since any other financial event in modern history. The frightening rise ended only after Kwasi Kwarteng stepped down. Only after Ms Truss resigned did they return to what could be considered “normal” territory.

Now it is difficult to compare different historical moments. The mini-budget was happening at a tense moment in financial markets, with the Bank of England ready to cancel quantitative easing. Not all roller coasters are caused by Mr. Truss. Nevertheless, if you compare that period to today, it is like night and day.

Investors are currently not very satisfied with the UK's economic outlook. They are making this known through the financial markets. But they certainly aren't intimidated by the way 2022's smaller budget will fare.

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