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UK government borrowing costs rose on Friday after stronger than expected US job data sparked a global downturn in bond markets, adding fuel to a sell-off in gilts.
The 10-year gilt yield rose 0.07 percentage points to 4.88 per cent but was still below the 4.93 per cent touched on Thursday, which was the highest level since 2008. Yields move inversely to prices.
Sterling, which on Thursday dropped 0.5 per cent, was down 0.7 per cent at $1.221 after the jobs numbers, which came in higher than economists had expected, suggesting the US central bank will be slower to cut interest rates.
Gilts have suffered in recent sessions amid a global rise in government bond yields driven by sticky inflation in some big economies.
Gordon Shannon, a portfolio manager at TwentyFour Asset Management. said the gilt market “needs Reeves to signal some understanding of the tougher global backdrop by cutting spending, while we wait for a fall in sterling to make gilts attractive enough for international buyers”.
The UK has been hit particularly hard by the global bond sell-off as investors worry about the government’s heavy borrowing needs and the growing threat of stagflation, which combines anaemic growth with persistent price pressures.
The credibility of the government’s economic plans are vulnerable to strains in the bond market after chancellor Rachel Reeves left herself just £9.9bn of headroom against her revised fiscal rules in last year’s autumn Budget.
Pooja Kumra, a UK rates strategist at TD Securities, said how Reeves addressed the lack of fiscal headroom would be key.
“Investors are questioning which will be the chancellor’s next option . . . spending cuts, more borrowing or taxes,” she said.
The gilts sell-off has in effect wiped out Reeves’ budgetary wriggle room, economists have estimated. The level of bond yields is an important determinant of the budget headroom, given its implications for the government’s interest bill, which exceeds £100bn a year.
Labour has sought to reassure investors this week, with Darren Jones, the number two at the UK Treasury, telling MPs on Thursday that the government was committed to “economic stability and sound public finances”.
