UK Bond Yields Near 1998 High, Adding To Pressure On Government

UK long bond yields soared to within a whisker of a 27-year high Tuesday, piling pressure on Prime Minister Keir Starmer’s government to rein in its fiscal stance.

The yield on 30-year bonds surged as much as nine basis points to 5.63%, catching up with moves in US counterparts after UK markets were closed Monday for a holiday. A move to 5.66% would be the highest since 1998.

UK borrowing costs had already been under pressure lately, creating an additional headache for Chancellor of the Exchequer Rachel Reeves ahead of her autumn budget. Reeves is expected to tighten the nation’s fiscal policy in order to keep on the right side of her government’s self-imposed fiscal rules.

Economists are predicting the UK will need to soon raise taxes. Reeves and Starmer have been at the mercy of bond yields because government borrowing costs are a key determinant of the fiscal arithmetic. 

Long gilts have been particularly vulnerable to selloffs due to waning demand from traditional buyers such as defined-benefit pension funds, as well as concerns over structurally higher inflation.

The rate on 30-year gilts has risen around 110 basis points over the last 12 months, compared to roughly 80 basis points in comparable US Treasuries. That’s driven the yield difference between UK two- and 30-year bonds to 164 basis points, nearing the highest closing level since 2017.

“With inflation having picked up again, it will be harder for the central bank to reduce rates anytime soon, so the two-year yield will stay anchored for now. And until Reeves shows her hand, the 2y/30y yield curve will likely widen further as the long end adjusts upward with higher inflation expectations and the rising fiscal risk premium.”—Ven Ram, macro strategist. Click here for the full analysis.

In the US on Tuesday, long bonds fell for a second day as investors demanded a higher premium amid fresh concerns over the independence of the Federal Reserve. President Donald Trump said he will remove Governor Lisa Cook following allegations that she falsified mortgage documents.