UK borrowing costs spiralled to a 27-year high today amid warnings that Labour is pushing Britain towards ‘economic oblivion’.
Yields on 30-year UK bonds, known as gilts, leapt to just below 5.7 per cent, the highest level since 1998 in the wake of a reshuffle seen as sidelining Rachel Reeves.
Higher yields mean investors are charging more money to lend to the UK – adding to the Chancellor’s Budget headache.
Markets are increasingly worried about Ms Reeves’ ability to balance the books with some estimating the black hole could be as big as £50billion. Investors are betting that more bonds will need to be issued to finance further borrowing.
They are also alarmed about inflation running at an 18-month high and expected to climb towards 4 per cent.
A reshuffle bringing Left-wing economic advisers into the heart of Keir Starmer’s Downing Street operation has fuelled fears of tax hikes.
Tory frontbencher Andrew Griffith said: ‘Labour are leading us towards economic oblivion.’
Conservative MP Tom Tugendhat posted on X: ‘We’re broke. And if we don’t decide how to tighten our belts it will be decided for us by those who refuse to lend us the money.’
In normal times a rise in bond yields would tend to mean markets anticipate higher interest rates and be accompanied by a stronger pound.
But today, sterling plunged as the market moves instead appeared to be stoked by lack of faith in the government.
The UK currency plunged by nearly two cents against the dollar in early trading to less than $1.34.
And sterling was nearly a cent lower versus the euro at less than €1.15.
Adding to the bleak day for the wider market, the FTSE 100 was also falling and on course for a fifth day in the red out of the last six.
Neil Wilson, UK investor strategist at Saxo Markets, said: ‘Thirty year yields at their highest in almost three decades is not a good look for the Labour government, and underscores that there is little fiscal or economic credibility left.’
Bond yields were also surging in Europe especially in France – whose government is facing imminent collapse.
But the UK’s borrowing costs are higher than those in other advanced economies and the gap is growing.
‘The moron premium is definitely evident as the spread between thirty year gilt yields and bond yields of peers widened to a record,’ said Mr Wilson.
Jane Foley, head of FX strategy at Rabobank, said: ‘The UK is going to be vulnerable to fiscal risks as the Autumn budget approaches, which is likely to remain a headwind for sterling.’
Ms Reeves faces a perfect storm at the Budget, with a clamour for more spending from Labour MPs even as the economy slows down and interest rates on the UK’s debt rise.
