Britain’s long-term borrowing costs have surged above six per cent, with one economist warning the bond market has entered the “danger zone”.
The jump piles pressure on Chancellor John Healey ahead of his first Budget, while London’s FTSE 100 fell 1.7 per cent.
The yield on 30-year UK government bonds reached around 6.07 per cent in early trading on Thursday, making it more expensive for the Treasury to raise new money.
Economist Damian Pudner, director at the Great British Think Tank, warned: “This is the bond market putting a price on Britain’s fiscal credibility. The real pain has only just begun.”
Mr Pudner said the 30-year yield had reached 6.065 per cent, adding: “A month ago I said 6% was the ‘danger zone’. Buckle up!”
The increase adds to the challenge facing Mr Healey as he tries to balance spending commitments with efforts to keep borrowing under control..
Axel Rudolph, chief technical analyst at IG, said: “Higher yields mean the Government has to pay more to finance its debt, putting further pressure on the public finances and making it harder to balance spending commitments with the need to keep borrowing under control.”
Government bonds, known as gilts, allow the Treasury to borrow money from investors. When their prices fall, their yields rise, meaning investors demand a higher return for lending to the Government.
That makes new borrowing more expensive, including when the Treasury replaces debt that is due to be repaid
A global bond sell-off has seen UK gilt yields hit six per cent
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Higher borrowing costs can leave the Chancellor with less money available for public services and other spending priorities.
Mr Healey must now set out his Budget plans while balancing spending commitments with efforts to keep borrowing under control.
The latest market turmoil could make that task harder by increasing the cost of financing Britain’s debt.
Mr Rudolph noted that even the recent decline in oil prices had failed to offer any sustained respite for bond markets.
Higher borrowing costs can leave the Chancellor with less money available for public services and other spending priorities
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“With yields still rising, the Chancellor faces an increasingly narrow path as he prepares to set out his plans for the economy,” he added.
The rise in borrowing costs also weighed on stock markets, with banks and consumer-facing businesses among those losing ground in London.
AJ Bell investment director Russ Mould said: “A renewed uplift in oil prices and bond yields put European stocks under pressure.”
UK borrowing costs hit highest level since 1998
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PAHe said Brent crude remained around $100 a barrel amid tensions between the US and Iran, while government bonds continued to sell off despite lower-than-expected US inflation figures.
Mr Mould added: “Gilt yields moving at such a pace presents a major challenge for their spending and borrowing plans.”