AJ Bell: UK borrowing costs soar ahead of local elections
The prospect of a period of political upheaval is taking its toll on UK bonds today, says AJ Bell head of financial analysis Danni Hewson.
She explains:
The yield on 30-year gilts has shot up, closing at the highest level since May 1998 as investors weigh up how fiscal policy might be impacted if a massive Labour drubbing in this week’s local elections results in a vote of no confidence for Keir Starmer.
“A new PM would likely mean a new chancellor, and one who might be more inclined to turn on the spending taps at a time when the country is faced with stagnant growth and another cost of living crisis.
“Although this risk premium is a symptom of nerves about rising inflation as the situation in the Middle East remains highly uncertain, it is being felt more acutely in the UK as the country has proven more susceptible to energy price shocks.
“Far from just being numbers on a spreadsheet, it makes doing stuff more expensive for the government and increases the interest paid on the huge debt pile run up during recent economic struggles. This limits what could be done by any keen new broom sweeping through Downing Street, especially if the current crisis delivers on the worst-case scenario set out by the Bank of England last week
Closing summary
Time to wrap up…
The UK government’s long-term borrowing costs have hit their highest level since 1998, amid rising fuel prices and concerns about political stability.
The yield – effectively the interest rate – on 30-year UK government bonds (gilts) hit 5.77% at lunchtime on Tuesday, up 0.13 percentage points – exceeding the 27-year high reached last September.
Yields have been rising across leading economies amid renewed fears over rising inflation, after US efforts to escort ships through the strait of Hormuz prompted Iranian reprisals.
But the UK has been hit particularly hard by higher borrowing costs since the onset of the conflict – with some investors blaming uncertainty about the outlook for Keir Starmer’s government.
Higher government borrowing costs will eat away at the headroom the chancellor, Rachel Reeves, has built up against her fiscal rules, in the Office for Budget Responsibility’s forecasts for tax and spending.
In other news…
HSBC has reported a $400m “fraud-related, secondary, securitisation exposure” in the UK, related to its investment banking division.
The loss helped to pull down HSBC’s profits, which was also hit by a jump in the potential losses it could see on soured loans to $1.3bn.
UK car sales have jumped, but the country is still on track to miss its targets for electric car take-up.
Rachel Reeves had a barney with her US counterpart, Scott Bessent, over the Iran war last month, it has emerged.
The chancellor and the US treasury secretary argued in person during the spring meetings of the International Monetary Fund, according to people briefed on the exchange, confirming a story first reported by the Financial Times.
