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Rachel Reeves will be forced to field questions from MPs about the turmoil in Britain’s bond market as the government’s borrowing costs reach their highest level since the financial crisis.
Lindsay Hoyle, leader of the House of Commons, said she had accepted an urgent question to the British Prime Minister from the Conservative opposition on the “increasing pressure of borrowing costs on public finances”.
Mr Hoyle’s decision, which requires Mr Reeves to appear in parliament on Thursday morning ahead of his long-planned trip to China, pushed the yield on 10-year Treasury bonds to 4.93%, up 0.12 percentage points in early trade. This is the highest level since. It has since returned to 4.86 percent.
The pound fell as much as 1% against the dollar, falling to $1.224, its lowest since November 2023, and was recently trading at $1.227.
Rising UK bond yields pose a major challenge to Mr Reeves’ plans, as they threaten to erase the government’s room for additional borrowing under budget provisions.
Mr. Reeves’ key fiscal rule is a promise to use tax revenue to cover all day-to-day public spending by 2029-30.
Recent bond market tensions have raised concerns about tax increases and spending cuts. The Ministry of Finance has indicated that it will cut spending rather than increase taxes.
Britain’s borrowing costs have soared as investors worry about the government’s large borrowing needs and the growing threat of stagflation, a combination of lackluster growth and persistent price pressures.
“The economy is entering stagflation,” said Mark Dowding, chief investment officer at RBC BlueBay Asset Management.
Sterling has also been hit by the dollar’s recovery, as a recent set of US economic data boosted investor confidence in the world’s largest economy.
Analysts at Brown Brothers Harriman said: “The decline in the pound and gilts reflects the deterioration in the UK’s fiscal outlook.”
The dollar index against a basket of six other currencies rose 0.1% on Thursday.
Chancellor Reeves left a tiny £9.9bn leeway for revised fiscal rules in last autumn’s budget, even after announcing a £40bn tax increase aimed at “wiping the slate clean” on the public finances. Ta.
Since then, rising bond yields have threatened budget space. The level of bond yields is a key factor in determining budget space, given its impact on the government’s interest bill of more than £100bn a year.
Analysts said they could see another sell-off in the bond market on Friday if U.S. Treasury yields rise and gold prices rise, keeping a close watch on U.S. jobs data.
“If the employment data is strong, it could be a very tough situation for British bonds,” said Pooja Kumra, UK rates strategist at TD Securities.
Analysts said the simultaneous fall in gold and sterling was an echo of the backlash caused by Liz Truss’s “mini” budget for 2022.
However, many investors believe the situation will fall short of the 2022 sovereign debt crisis.
“I expect things to start bottoming out… We’ve already seen a washout last year in gold stocks,” said Jeffrey Yu, senior strategist at BNY. “I’m not denying there are problems in the UK, but when you suddenly start comparing things to 2022, I think that’s what’s driving things forward.”