Britain’s long-term borrowing costs shot to a 27-year high, piling pressure on Downing Street about the precarious state of UK finances as concern builds about stress in the financial system reaching a breaking point.
Yields on 30-year gilts surged past 5.5%, marking an increase of half a percentage point from early February. The bonds, which were at the center of the 2022 crisis caused by Liz Truss’s mini-budget, have once again come under strain as Chancellor Rachel Reeves faces few options to help the economy if a recession hits.
“The UK is a weak link, and gilts are getting bullied,” said Neil Mehta, a portfolio manager at RBC BlueBay Asset Management.
The extreme speed and severity of the global bond market selloff, sparked by US President Donald Trump’s chaotic rollout of tariffs, has also led to speculation about whether the financial system can withstand the volatility. In a report, the Bank of England warned about the risk of “further sharp corrections,” and hinted about the possibility of unforeseen shocks still to come.
BOE Warns Risk of ‘Further Sharp Corrections’ in Markets Is High
“The probability of adverse events, and the potential severity of their impact, has risen,” wrote the central bank’s Financial Policy Committee, adding that hedge funds have faced “significant” margin calls from their prime brokers.
The UK’s bond market turmoil is another marker of the country’s diminished standing, especially compared with European Union. With Germany able to spend billions to support its defense and infrastructure industry and more investors turning to the euro for stability, the UK risks being relatively marginalized.
“This is unsustainable for the UK,” Kathleen Brooks, research director at XTB, wrote in a note. “Watch out for official statements, either from government or from the Bank of England to try and assuage the bond market.”
The pound has been weakening against the euro. The common currency rose as much as 0.9% to above 86 pence, its strongest level since January 2024.
And options markets are flashing renewed confidence in the euro over the pound, with one-month risk reversals showing the strongest tilt toward the euro since January. More than three-quarters of contracts that reference the pair are targeting euro gains, according to data from this week.
What Bloomberg strategists say…
“If the moves persist and if the economy stays sluggish relative to the government’s projections, Reeves may have to put up taxes, which may just perpetrate a vicious feedback loop on longer-dated gilts.”
—Ven Ram, Macro Strategist, Dubai
While bond markets globally have tumbled, the UK is in a tough position because of the promises laid out by Reeves to fill a hole in the country’s finances. Reeves has left herself wafer-thin headroom against her main fiscal rule to pay for day-to-day spending through taxation, meaning the government can only borrow to invest.
Asked whether the US tariffs and resulting fallout constituted a big enough economic shock for her to override self-imposed fiscal rules, including that tax receipts should fund day-to-day government spending, Reeves said: “no.”
“Our fiscal rules are non negotiable — and they’re non negotiable because they’re absolutely essential for economic stability,” Reeves said. “In this time of heightened global uncertainty, I think it’s even more important to show that the UK is absolutely committed to economic stability and the fiscal rules that underpin it.”
Bond Markets Retreat as US Treasuries Lead Yield Jump Worldwide
The 30-year bond yield was last higher in 1998, when Tony Blair was prime minister and the BOE was slashing interest rates from a six-year peak to contain the global fallout from the Asian currency crisis and Russian debt default.
Investor appetite for fresh UK debt has also recently been weak. The Debt Management Office’s sale on Wednesday of £4.5 billion five-year notes saw a gauge of demand fall to the lowest this year.
With so much turmoil, traders have increased expectations for the BOE to cut rates to support the economy. Markets now show 85 basis points of cuts priced this year, the equivalent of three quarter-point reductions.
The bond market moves “demonstrate continued fear as to the UK’s fiscal position,” said Alex Everett, investment director at Aberdeen. “This may force earlier moves from the Bank of England than previously expected.”
With assistance from Alex Wickham and Vassilis Karamanis.
This article was generated from an automated news agency feed without modifications to text.
