Originally published at: This week in charts: A focus on UK bond yields – InvestEngine Insights
UK gilt yields reach 27-year high
UK government bond yields surged this week, with the 10-year gilt reaching its highest level since 2008 and the 30-year gilt hitting a fresh 27-year high. As bond yields represent the cost of government borrowing, UK borrowing costs for the new Labour government have now risen significantly.
Several factors have contributed to this sharp rise in yields. Chief among them is the market’s expectation that both the Federal Reserve and the Bank of England will maintain higher interest rates over the longer term than previously anticipated. The US has played a central role in the recent global bond sell-off (bond yields increase as bond prices fall), driven in part by concerns that inflationary pressures could be stoked by the policy agenda of President-elect Donald Trump, particularly the potential for new tariffs. These fears were heightened by the release of minutes from the Federal Reserve’s December meeting, which projected higher inflation and a reduced likelihood of rate cuts in 2025.
As illustrated in the chart below, UK gilt yields tend to move in tandem with US Treasury yields. Unlike the yield spike during the 2022 Truss mini-budget crisis, which was largely confined to UK bonds, this week’s increase reflects a broader global trend, with yields rising across the UK, US, and Europe.
In addition to rising interest rate expectations, anxiety over increased government borrowing following the recent Budget has further fueled the surge in yields. There are growing concerns that the economy may be entering a period of “stagflation,” characterised by low growth and persistent inflation. This scenario presents a significant challenge for the Bank of England, as it limits the scope for interest rate cuts aimed at stimulating economic growth.
Sterling continues its slide
Concerns about the state of the UK economy have also weighed on sterling this week, with the pound declining by 1% against the dollar to $1.23, underperforming its major peers. This decline reflects growing investor unease over the UK’s fiscal outlook and sustainability.
The pound’s recent weakness continues a broader trend, having fallen from a high of $1.34 in October last year. Notably, sterling began its descent immediately following Rachel Reeves’ Autumn Budget announcement on October 30th.
Pain for the FTSE 250
The uncertainty surrounding the UK economy has also impacted domestic equity markets. While the internationally-oriented FTSE 100 remained relatively insulated – benefiting from the weaker pound due to its significant overseas earnings – the more domestically-exposed FTSE 250 saw a sharp decline of nearly 4%, hitting a nine-month low.
This divergence highlights investor concerns about the health of the UK’s domestic economy, amid rising borrowing costs and fiscal pressures.
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