UK government bond yields hit one-year high after budget

UK government bond yields have hit a one-year high after the budget as investors take fright at the prospect of higher borrowing and interest rates staying higher for longer.
Ten-year gilt yields, which are a proxy for the government’s borrowing costs, rose on Thursday morning by 0.08 percentage points, to a 12-month high of 4.44 per cent. Yields on two-year gilts, which are sensitive to changes in the interest rate outlook, rose by by 0.1 percentage points to 4.41 per cent: a four-month high. Bond yields move inversely to prices.
Investors had a mixed reaction to Rachel Reeves’s plans to spend an additional £70 billion a year in her maiden budget, with traders welcoming the decision to raise taxes by £40 billion a year. The government will, however, also expand borrowing by £30 billion a year in the course of the next parliament, leaving itself just under £10 billion in fiscal headroom to meet its new fiscal rule and causing a bond sell-off later on Wednesday afternoon.
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The UK’s Debt Management Office said the supply of gilts to the market would rise to just under £300 billion next year: an increase of £19.2 billion in 2024-25 and in line with market expectations. A higher supply of bonds pushes down existing bond prices.
Abbas Khan, analyst at Barclays, said gilts would come under further selling pressure as “heavy issuance will test the absorption capacity of the market, as well as the government’s resolve in delivering against its ambitious fiscal plans”.
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Gilts have also been sold off over worries that the budget’s spending policies will lead to a temporary spike in inflation next year and prevent the Bank of England from carrying out significant interest rate cuts in 2025. The yield gap between UK ten-year gilts and equivalent bonds in the US and Germany also widened in Thursday morning trading, reflecting the premium investors are charging to hold UK government debt.
James Smith, economist at ING, said the bond sell-off had been overdone as the inflationary impact of the tax rises and investment spending would be muted. “Gilt yields are too high internationally and falling inflation and a more doveish Bank should help to lower yields again. UK 10-year yields have risen above their US equivalents but that might not last long,” he said, in reference to the US presidential elections next week.