A UK Treasury minister has been forced to take questions from MPs about the tumult in UK bond markets as British government borrowing costs hit their highest level since the financial crisis.
Sir Lindsay Hoyle, Speaker of the House of Commons, said he had accepted an urgent question for UK chancellor Rachel Reeves from the Conservative opposition about the “growing pressure of borrowing costs on the public finances”.
Hoyle’s ruling that a Treasury minister should appear in parliament on Thursday morning came as the 10-year gilt yield rose as much as 0.12 percentage points to 4.93 per cent in early trading, the highest level since 2008. It later eased back to 4.84 per cent.
Reeves, who is about to leave for a long-scheduled trip to China, dispatched her deputy Darren Jones to answer the questions.
Jones said that UK financial markets were still functioning in an orderly way, that it was normal for gilt prices to vary and that there was still strong underlying demand for UK government bonds.
The minister said that the Treasury was still working on a multi-year spending review due this summer on the basis of assumptions set out in the October Budget.
However he acknowledged that the Office for Budget Responsibility, the independent Budget watchdog, would come up with fresh forecasts in March 26, which could then have an impact on discussions with ministers.
The pound was swept up in the sell-off, dropping as much as 1 per cent against the dollar to $1.224, its weakest level since November 2023, and was recently trading at $1.228.
“The sell-off in [the pound] and gilts reflect a deterioration in the UK’s fiscal prospects,” said analysts at Brown Brothers Harriman.
Sterling has also been hurt by a resurgent dollar as a string of recent US data has bolstered investor confidence in the world’s largest economy as sentiment in the UK has flagged.
UK borrowing costs have risen sharply as investors worry about the government’s heavy borrowing needs and the growing threat of stagflation, which combines lacklustre growth with persistent price pressures.
“The economy is entering stagflation,” said Mark Dowding, chief investment officer at RBC BlueBay Asset Management.
The recent bond market strains also raise the spectre of tax rises or spending cuts. The Treasury has signalled that it would reduce expenditure rather than increase taxes.
In his Commons appearance on Thursday, Jones, chief secretary to the Treasury, insisted that Labour had been tackling the financial “mess” left by the last Conservative government, arguing that the previous administration had left a £22bn “black hole” in the public finances.
But shadow chancellor Mel Stride, who had posed the urgent question, said Reeves should have attended parliament herself.
“Where is the chancellor?” he asked. “It is a bitter regret that at this difficult time, with these serious issues, she herself is nowhere to be seen.”
Reeves left herself a slender £9.9bn of headroom against her revised fiscal rules in last year’s autumn Budget even after announcing a £40bn tax-raising package that aimed to “wipe the slate clean” on public finances.
Increases in government debt yields have since put that budgetary wriggle room under threat. The level of bond yields is an important determinant of the budget headroom, given its implications for the government’s interest bill, which exceeds £100bn a year.
The gilts market could suffer another bout of selling on Friday, analysts said, if closely watched jobs data in the US was to push yields higher on US Treasuries, dragging gilts with them.
“It can turn extremely grim for gilts if we see a strong payroll,” said Pooja Kumra, a UK rates strategist at TD Securities.
Analysts have said the simultaneous sell-off of gilts and the pound carried echoes of the reaction triggered by the “mini” Budget of Liz Truss in 2022.
But many investors think the situation is short of the 2022 gilts crisis.
“I do anticipate things to start bottoming out . . . On gilts the washout already happened last year,” said Geoffrey Yu, a senior strategist at BNY. “I’m not denying there are issues in the UK, but to suddenly draw comparisons to 2022, I think that is pushing things.”
