Yield on fresh UK government debt hits highest level since 2007
The amount of interest the UK government has to pay investors buying its newly minted debt has hit its highest level since the financial crisis.
Britain’s Debt Management Office (DMO) – the body tasked with issuing bonds – today sold a tranche of gilts to traders with a yield just shy of 5.7 per cent, the highest return on the instrument since 2007.
Some £4bn of cash was raised by the sale, the proceeds of which will be used to finance government spending that is not generated from tax revenue.
Governments have to borrow money from international investors when the amount they spend tops the amount they earn from taxes. In the UK, the DMO issues gilts, a type of IOU.
June 2007 was the last time the DMO issued an instrument with such a high yield.
It was the highest yield on a two-year gilt this century and the greatest return offered on any gilt in over 15 years.
Financial markets have been effectively asking the government to bump up yields on newly issued debt by pricing in further interest rate rises by the Bank of England.
Traders now think Britain’s official interest rate – Bank Rate – will peak at around 6.25 per cent. As a result, the government has to offer a higher rate of return on its debt otherwise investors would likely refuse to buy the debt.
Rates on the two-year and 10-year gilts are 5.37 per cent and 4.49 per cent respectively, signalling that investors think interest rates will rise in the short term before the Bank of England later cuts them in response to softening economic activity.
There is also concern that the UK is suffering from high inflation, forcing yields up further.
Inflation erodes the spending power of debt returns. When it is high, investors tend to ask for higher returns to compensate them for the loss of purchasing power.
Bank governor Andrew Bailey and co have already jacked up borrowing costs 13 times in a row to a near 15-year high of five per cent.
Bond prices move inversely to yields.