Concerns over UK borrowing costs as US jobs figures spark bond market volatility | economics

Concerns about the UK government's borrowing costs resurfaced on Friday after stronger-than-expected US employment figures sparked volatility in global financial markets.

As the global bond market sell-off accelerates, investors have warned that the UK is particularly at risk amid growing concerns about chronic inflation and rising long-term interest rates.

Markets are no longer fully pricing in the Bank of England's two base rate cuts in 2025, and research on Friday showed that nearly 700,000 UK homeowners face rising mortgage costs when their fixed-rate contracts end this year. It happened.

Yields on government bonds around the world rose sharply at the end of a tumultuous week for global markets, before falling after the Biden administration's last jobs report showed strong growth in the U.S. labor market in December.

The number of new jobs added in the world's largest economy accelerated to 256,000 from 227,000 in November, easily surpassing expectations for a modest increase.

Investors said the figures signaled the resilience of economic growth and inflationary pressures and reduced the likelihood of a rate cut by the U.S. central bank amid concerns that high inflation could become entrenched across advanced economies.

For global bonds, the strong US jobs report only adds to their challenges. Seema Shah, chief global strategist at fund manager Principal Asset Management, said the peak in yields has not yet been reached, suggesting additional stress on several markets, particularly the UK, which has no room to spare.

It comes amid warnings that higher borrowing costs could threaten Rachel Reeves' financial rules. The Guardian understands that after a bruising week for the Government, the Treasury has begun considering cuts to public services to avoid breaching the Prime Minister's non-negotiable rules.

In fact, UK government bond yields (gilts) rose to near-record levels on Thursday following the US job market announcement, but then fell slightly as investor anxiety persisted. Gilt yields have risen sharply over the past three months due to domestic concerns as well as global developments, pushing Britain's long-term borrowing costs to their highest level since 1998.

The pound fell nearly 1 cent, or 0.7%, against the U.S. dollar as the U.S. currency rose sharply against other major international currencies. Stock prices fell on both sides of the Atlantic.

Rachel Reeves Treasury has begun considering cuts to public services, the Guardian understands. Photo: Dan Kitwood/Reuters

Fluctuations in global markets could push Britain's borrowing costs higher, city analysts said. Changes in the U.S., the world's largest and most important bond market, typically affect borrowing costs elsewhere.

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In the UK, the rise in borrowing costs has been particularly pronounced amid investor concerns about nearly stagnant economic growth and sticky inflation. This not only forced the Bank of England to maintain high interest rates for longer, but also destabilized the government's financial situation.

Economists have warned that continued increases in borrowing costs could wipe out the $10 billion buffer Reeves had set aside in the fall budget to meet basic fiscal rules that require him to match everyday spending with tax receipts.

A key deciding factor is the outlook, which will be updated when Treasury watchdog the Office for Budget Responsibility (OBR) publishes its next outlook for the economy on March 26, sparking speculation the Chancellor may have to announce tax rises or spending cuts. .

Reeves had planned to issue a low-key statement with his forecasts this spring, but Treasury sources said OBR forecasts showing breaches of fiscal rules would not be allowed to pass without action to address them.

The Treasury said Reeves would prefer spending cuts over tax hikes after repeatedly promising not to take further revenue-raising measures after the $40 billion October tax hike budget.

Analysts at the Resolution Foundation said a calm return to bond markets could help the prime minister. Now that she faces bond market jitters, the prime minister must stay on course before making major financial decisions that will have a very real impact on households, they said.

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