(Bloomberg) — The UK’s long-term borrowing costs have come close to their highest level in more than a quarter of a century, ramping up pressure on Chancellor of the Exchequer Rachel Reeves to keep the market on side ahead of a raft of bond sales this week.
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The yield on 30-year gilts rose Monday as much as four basis points to 5.19%, nearing the 5.21% spike of 2023 and close to levels seen in the late 1990s, before paring the move.
Britain is in the cross-hairs of investors since the Labour government announced a near record slate of borrowing in October’s budget, reigniting concerns about the country’s debt pile. Reeves’ spending plans contributed to a selloff in gilts, taking the benchmark 10-year yield up about 40 basis points since late October.
“The budget continues to weigh on the entire curve,” said Pooja Kumra, senior UK and European rates strategist at Toronto Dominion Bank. “This in particular holds as all the budget led increases in supply will be visible in the first quarter.”
The market moves show the extent to which the government is walking on a tightrope, as it tries to keep debt investors on side and dispel the memory of former Conservative Prime Minister Liz Truss’ disastrous mini-budget of 2022. Reeves already received a warning from bond vigilantes in October when yields surged in response to the prospect of bigger debt auctions.
Reeves’ main fiscal rule that she cannot borrow for day-to-day spending in 2029-30, which she has said is non-negotiable, may come under increasing pressure given she has just £9.9 billion ($12.4 billion) of headroom.
Investors are preparing to absorb as much as £6.5 billion combined of five and 30-year gilts this week through auctions from the UK Debt Management Office. That’s in addition to a BOE operation to reduce its balance sheet via the sale of securities in the seven- to 20-year bucket later Monday — a process known as quantitative tightening.
US Treasuries also felt the heat of impending bond sales, with the equivalent yield earlier rising to a 14-month high as investors prepared for three-, 10- and 30-year securities this week.
Further headwinds to gilts come from traders paring bets on interest-rate cuts from the BOE this year. Money markets are fully pricing just two quarter-point reductions, down from more than three at the start of last month.
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The pain of higher borrowing costs is also being felt by UK homeowners. November mortgage approvals fell to the lowest level since August, crimping the government’s plans to deliver 1.5 million new homes over five years.
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