British borrowing costs edged higher yesterday as ‘nervous’ investors fretted over how Rachel Reeves will pay for her lavish spending spree.
The yield on ten-year gilts rose as high as 4.62 per cent on speculation that the Chancellor will be forced to increase borrowing or raise taxes to make her Budget numbers add up.
It eased later in the session to 4.55 per cent – thanks to weaker-than-expected US inflation boosting hopes of interest rate cuts across the Atlantic – but remained the highest in the Group of Seven major industrialised nations.
This means that Britain is paying more to borrow on international bond markets than every other leading developed economy on Earth.
Oliver Faizallah, an analyst at wealth manager Charles Stanley, said: ‘Markets remain nervous about the potential for either higher taxes or an increase in borrowing in the future.
‘An increase in taxes may be seen as more market-friendly, but would be politically damaging, while an increase in borrowing would put further pressure on already elevated gilt yields. Fiscal concerns in the UK will no doubt keep gilt yields higher for longer.’
Borrowing costs: The yield on ten-year gilts rose as high as 4.62% on speculation the Chancellor will be forced to increase borrowing or raise taxes to make her numbers add up
He noted that the easing in gilt yields after early rises ‘had nothing to do with the spending review but came on the back of lower-than-expected inflation in the United States’.
US inflation nudged up only slightly from 2.3 per cent in April to 2.4 per cent in May, lifting pressure on bond yields around the world.
The mood was further boosted after US President Donald Trump declared that a US-China trade deal is ‘done’ – an announcement that suggested tensions between the world’s two largest economies were thawing.
It was not enough, however, for the FTSE 100 to close at new highs, with the index ending the day up just 0.1 per cent at 8864.35, having spent much of the session above March’s record close of 8871.
Investors warned that doubts remain over Labour’s handling of the economy – and the outlook for tax, spending and the public finances.
‘Another fiscal event goes by with little resolved in terms of allaying investor fears that fiscal policy is on a sustainable footing,’ said Neil Mehta, portfolio manager at capital market company RBC BlueBay Asset Management.
‘With Labour’s favourability rating in free fall with the public, the Government is bending to political pressure and proposing a raft of spending measures, seemingly taking their eye off the ball regarding fiscal responsibility.
‘Until fiscal policy is brought back on a sustainable path, investors will continue to demand a higher premium for investing in UK assets, such as gilts, than peers.’
Gordon Shannon, a fund manager at Twenty Four Asset Management, said he was ‘disappointed that there wasn’t more clarity’ on how the Chancellor intended to meet her fiscal rules.
Matthew Amis, investment director at Aberdeen, said that Reeves yesterday had ‘offered just enough detail and security for the gilt market to focus away from the UK’s fiscal situation until the autumn at least’.
But he added: ‘Scrutiny will be high and any mis-step from the Chancellor will be reflected in higher gilt yields.
‘Big decisions are required from Chancellor Reeves in the autumn.’
Ian Stewart, chief economist at Deloitte, said: ‘The autumn Budget will be the big test of whether the Government’s fiscal plans are holding in the face of global economic headwinds.’
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