Gilts, sterling and FTSE 250 slump as markets digest Budget borrowing plans
UK government borrowing costs have climbed to their highest level this year as investors digested the impact of the new government’s first Budget.
Chancellor Rachel Reeves announced that borrowing would be around £30bn a year higher to help fund an investment push, which the Office for Budget Responsibility (OBR) described as “one of the largest fiscal loosenings of any fiscal event”.
The Debt Management Office said that gilt issuance was likely to reach £300bn in 2025, up from the previous estimate of £278bn and the second largest figure on record.
The increase in investment is likely to push up inflation and slow the pace of interest rate cuts, the OBR said on Wednesday.
Although traders initially seemed to take the Budget in their stride, yields on government debt have increased significantly over the past 24 hours or so.
The yield on the benchmark 10-year gilt hit 4.55 per cent this afternoon, its highest level since October last year. The yield on the rate-sensitive two-year gilt hit its highest level since May as investors re-priced the short term path for UK interest rates.
While other government bonds were also selling off on Thursday, the sell-off in UK government debt was more aggressive than elsewhere.
Investors also sold the pound, which fell to its lowest level against the dollar since August.
“The volatility in the gilt market has been extraordinary, with the 10-year yield up 30bps in the past 24 hours alone,” Kyle Chapman, FX market analyst at Ballinger Group said.
Kathleen Brooks, research director at XTB said it was evidence that the Chancellor had “overestimated” the market’s desire to absorb more government debt.
“Unfunded borrowing to invest is seemingly treated the same way as unfunded tax cuts. Higher public spending is not what investors want to see,” she added.
Simon French, head of research at Panmure Liberum, noted that gilt spreads – which measure the yield relative to other countries – were “small by mini Budget standards”.
However, he warned on X that markets were “definitely moving into ‘squeaky bum’ territory.”