- The UK government is currently facing a significant challenge with its long-term borrowing costs, which have reached a 25-year high. This increase in borrowing costs is attributed to global investors’ expectations of higher interest rates.
- Specifically, the yield on 30-year UK government bonds, known as gilts, has risen to 5.209%, the highest level since the summer of 1998. Yields move in the opposite direction of bond prices, so this increase in yield corresponds to a decrease in bond prices.
- Rising bond yields pose difficulties for governments because they lead to higher borrowing expenses. For much of the past 25 years, governments didn’t worry about the cost of servicing their debt, as central banks had lowered interest rates to near zero following the 2008-2009 financial crisis.
- During Liz Truss’s leadership, the UK experienced a surge in bond yields due to concerns about tax cuts that were not adequately funded. However, the recent upward trend in bond yields is primarily driven by the anticipation that interest rates will remain elevated for an extended period to combat inflation.
- This situation also implies that the Conservative party may have limited ability to influence bond markets by replacing a prime minister for a second time. Higher bond yields are expected to constrain the government’s ability to engage in pre-election giveaways, such as tax cuts or increased spending, as these actions might be viewed as inflationary by financial markets.
