Fresh headache for Rachel Reeves as UK gilt yields spike to 1998 levels
UK gilts have spiked to 30-year highs after a selloff in US Treasuries sent government bond markets worldwide spiralling.
The yield on 30-year gilts spiked to 5.68 per cent this afternoon, before falling back slightly to 5.62 per cent, well above the previous multi-decade high of 5.47 per cent reached in January.
The movement has largely been caused by a spike in US Treasury yields, which jumped above five per cent last night and have continued to remain elevated, causing one hedge fund chief to describe it as a “meltdown.”
Treasury yields have soared as banks sell off bonds to raise cash for clients withdrawing their money in a panic, while some analysts have suggested that the market has “lost faith” in US assets.
This was accelerated today after Trump hit China with a 104 per cent tariff on goods, threatening a breakdown in trade between the world’s two largest economies.
Bond yields of the UK and US governments closely track each other, which has led to gilt yields simultaneously soaring.
“If the Treasury yield falls, gilts become more attractive on a relative basis, so investors might sell Treasuries and buy gilts,” explained Hal Cook, senior investment analyst at Hargreaves Lansdown.
Gilts and Rachel Reeves
The rise in gilt yields is set to be the largest single-day move since former prime minister Liz Truss sent bond markets into a spiral after the failed mini-budget.
However, a repeat of the LDI crisis that forced the Bank of England to step in seems unlikely, as defined benefit pension schemes took steps in the wake of the indicent scare to adjust their strategies.
“While this is nothing compared to the mini-budget-induced surge of 2022, it certainly piles on the pressure for Rachel Reeves,” said Chris Beauchamp, chief market analyst at IG Group.
The Chancellor pushed back this week over suggestions that Trump’s trade war and its effect on the markets would cause her to break her own fiscal rules on reaching a balanced budget.
In the Spring Statement last month, Reeves revealed the government had just under £10bn of headroom to meet her fiscal rules, which could be easily eaten into by the rising cost of borrowing.
“She can legitimately point to the crisis being manufactured in the US, but that is small comfort when the UK economy may well be on its way to a recession,” added Beauchamp.
“The government will find its room for manoeuvre limited unless the Chancellor drops her fiscal rules.”