The UK bond market is selling strong and the pound has fallen

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UK 10-year borrowing costs rose on Thursday as the bond market sold off, hitting the pound and potentially derailing the Labor government’s fiscal plans.

10 years Gilt It rose as much as 0.12 percentage point to 4.93 percent in early trade, its highest level since 2008, before easing to 4.82 percent.

The pound was again swept up in the sell-off, falling 0.6 percent against the dollar to $1.229, its weakest since November 2023.

Borrowing costs in the UK have risen sharply as investors worry about the government’s high borrowing needs and rising inflationary pressures, combining a lack of growth with persistent inflationary pressures.

“The economy is going into recession,” said Mark Dowding, chief investment officer at RBC BlueBay Asset Management.

Sterling The dollar was hurt by a rebound as recent U.S. data boosted investor confidence in the world’s largest economy.

“The sell-off in (the pound) and gilt reflects a deterioration in UK fiscal prospects,” said analysts at Brown Brothers Harriman.

The dollar index, which measures the currency against a basket of six others, was up 0.1 percent on Thursday.

Chancellor Rachel Reeves aims to “clean up” public finances after announcing a £40bn tax stimulus package, leaving herself £9.9bn of headroom on revised fiscal rules in the Budget.

Since then, rising government debt yields have put that part of the budget swing at risk. Given the implications for government interest payments of more than £100bn a year, bond yields are a crucial part of the budget.

The gilts market could face another sell-off on Friday, analysts said, as closely watched jobs data in the US pushed yields higher on US Treasuries and dragged gilts down with them.

“If we see strong wages, it could be very disappointing for gilts,” said Pooja Kumra, UK price strategist at TD Securities.

Analysts said the simultaneous sell-off in gilts and the pound echoed the reaction triggered by the Lease Trust Budget “mini” in 2022.

But many investors think the situation is somewhat worse than the gilts crisis of three years ago.

“I expect things to start going downhill. . . The bath in gilts happened last year,” said Jeffrey Yu, senior strategist at BNY. I don’t deny there are issues in the UK, but to suddenly compare it to 2022, I think that’s pushing things.