UK government seeks ways to ease bond market anxiety after soaring borrowing costs

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The British government sought to calm the turmoil in Britain's bond markets on Thursday by saying it would stick to fiscal rules as borrowing costs reached their highest levels since the financial crisis.

Darren Jones, Britain's second-in-command at the Treasury, told lawmakers that Britain's gold market continues to function in an orderly manner even after the yield on 10-year gold bonds rose to 4.93%, the highest since 2008, and the pound fell by a hundredth. said to 1% against the dollar fell to the lowest level in more than a year.

Jones said there was no doubt about the government's commitment to economic stability and sound public finances. That’s why meeting financial rules is non-negotiable.

Jones' appearance came after Sir Lindsey Hoyle, leader of the House of Commons, fielded urgent questions from the Conservative opposition about the rising pressure of borrowing costs on public finances.

Prime Minister Rachel Reeves, who is about to embark on a long visit to China, asked Treasury Secretary Jones for a response.

The yield on 10-year government bonds rose by 0.12 percentage points, and then the yield on gold bonds rebounded, causing the yield on the day to rise slightly to 4.81%. Yields move inversely to prices.

Sterling was caught in a sell-off and fell to $1.224, the weakest since November 2023, before recovering partially at $1.229.

sale of [the pound] Analysts at Brown Brothers Harriman said the gilts reflected a deterioration in Britain's financial outlook.

Britain's borrowing costs have surged as investors worry about the government's excessive borrowing needs and the threat of stagflation combined with sluggish growth and persistent price pressures.

Jones argued that it was normal for gold prices to fluctuate and that underlying demand for UK government bonds remained strong.

The auction, held yesterday, received three times more bids than the amount offered, he said.

The Minister said the Treasury was continuing to progress its multi-year spending review until this summer, based on assumptions set out in the October Budget.

But he acknowledged that the independent budget watchdog, the Office for Budget Responsibility, would issue new forecasts on March 26, which could influence subsequent discussions with ministers.

Recent instability in the bond market is also raising concerns about tax increases or spending cuts. The Treasury has said it will cut spending rather than increase taxes if necessary.

Raising urgent questions, shadow chancellor Mel Stride said Reeves should have attended parliament in person.

Where is the Prime Minister? he asked. It's such a shame that she can't be seen as herself due to serious issues during these difficult times.

He later urged Reeves to cancel his trip to China and focus on the country instead. He attacked Labor's embarrassed attempts to reassure markets about the economic chaos of its own creation.

Even after Reeves announced a $40 billion package of tax increases to gut public finances, he left $9.9 billion room for revised fiscal rules in last fall's budget.

The Prime Minister's key fiscal rule is a commitment to fund all routine public spending through tax receipts by 2029-30.

Since then, rising government debt yields have threatened budgetary room to move. Bond yield levels are an important factor in determining budget space, given their impact on government interest bills that exceed $100 billion annually.

Tomasz Wieladek, chief European economist at T. Rowe Price, said investors are looking for some kind of guidance from someone, but governments are not the problem. He added that the Bank of England would hold on to this for as long as possible. He added that the measure was not large enough to merit anything other than a verbal response from policymakers.

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Analysts said the gold market could see another selloff on Friday if closely watched U.S. employment data pushes yields on U.S. Treasury bonds higher and pulls gold along with it.

Pooja Kumra, UK rates strategist at TD Securities, said it could get extremely bleak for gilts if we see strong payrolls.

Analysts said the simultaneous selling of gold and sterling reflected the reaction triggered by Liz Trusss miniBudgetin2022.

However, many investors believe the situation falls short of a 2022 gilt crisis.

“We already had a fiasco last year in Gilts,” said Geoffrey Yu, chief strategist at BNY. I don't deny that there are problems in the UK, but suddenly I think things are being pushed forward compared to 2022.

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