Britain has become the first G7 economy to see national borrowing costs top 6 per cent since the eurozone crisis as it was battered in a bond market rout.
The surge in yields on UK 30-year bonds, known as gilts, meant investors were charging as much to lend to Britain as they did to beleaguered Italy in 2012.
Gilts were caught up in a global bonds sell-off on Thursday which also spread to the stock market, with as much as two per cent wiped off the value of the FTSE 100 in frantic early trading.
Yields on 30-year gilts – which rise as their prices fall – jumped to 6.03 per cent, the highest level since 1998. And yields on 10-year gilts spiked above 5.5 per cent, a 19-year high.
Bonds across the world were caught up in the carnage as oil prices reversed an overnight dip to climb back above $100 a barrel.
Markets have been jittery since the start earlier this year of Donald Trump’s Iran war, which has pushed up oil and gas prices, stoking inflation fears and fuelling worries over government debt.
The surge in yields on UK 30-year bonds, known as gilts, meant investors were charging as much to lend to Britain as they did to beleaguered Italy in 2012
Those fears have intensified in recent weeks as hopes of a lasting solution to the war fade. In Britain, Labour’s reluctance to tackle the ballooning benefits bill even as spending demands rise is adding to investor concerns as the Budget approaches.
The UK is already paying higher borrowing costs than any other member of the G7 group of advanced economies, having swapped places with Italy, once seen as a basket case.
Back in September 2012, when Italian 30-year debt was last priced at more than 6 per cent, investors were lending to Britain at around half that rate.
The latest bond chaos spilled over into global stock markets with the FTSE 100 initially falling as much as 2 per cent, or more than 200 points in early trading on Thursday. It eventually closed 1.7 per cent, or 178 points lower.
The rise in UK borrowing costs has continued unabated since Andy Burnham became Prime Minister, despite his repeated insistence that he will stick to fiscal rules that oblige the government to target lower borrowing and debt.
It represents a huge headache for Chancellor John Healey ahead of the Budget this month, as the increase in debt interest payments means he will have less to splash out on priority areas such as defence spending, social care and the cost of living.
Economists estimate Mr Healey’s ‘headroom’ – a buffer against meeting fiscal rules – has already shrunk from £24 billion to as little as £8 billion since the time of the spring statement in March.
Susannah Streeter, chief investment strategist at wealth manager, Wealth Club said: ‘The bond market is adding to the pressure cooker ahead of the UK Budget.
‘With debt already high and interest payments eating up a hefty chunk of public finances, sustained yields at these levels could further squeeze the Chancellor’s wiggle room when he sets out his spending plans.’
The bonds sell-off is also a nightmare for borrowers as higher gilt yields lift wider market borrowing costs, pushing up mortgage rates.
David Hollingworth, associate director at broker L&C Mortgages, said a jump in the average two-year fixed rate from 4.68 per cent to 5.11 per cent over the past month has already added around £600 a year to a typical £200,000 repayment mortgage.
‘The ongoing turmoil in the global markets is likely to spell more bad news for mortgage borrowers,’ Mr Hollingworth added.
Dan Coatsworth, head of markets at AJ Bell, said: ‘Bond investors waste no time in letting the world know when they lose faith in fiscal policy.
‘This is where the term “bond vigilantes” comes from. When investors lose confidence in government finances, they can effectively stage a protest by selling bonds.
‘That pushes bond prices down and yields up. Higher borrowing costs can then act as a powerful incentive for governments to restore market confidence.’
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