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UK 10-year borrowing costs climbed further on Thursday as a bond market sell-off deepened, hitting the pound and threatening to derail the Labour government’s fiscal plans.
The 10-year gilt yield rose 0.08 percentage points to 4.89 per cent in early trading, the highest level since 2008. Sterling dropped 0.8 per cent against the dollar to $1.226, its weakest since November 2023.
UK borrowing costs are rising 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.
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.
The dollar index, which measures the currency against a basket of six others, was up 0.1 per cent on Thursday.
Chancellor Rachel Reeves left herself a slender £9.9bn of headroom against her revised fiscal rules in the 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.
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.
