Pound tumbles as UK bond sell-off deepens
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The news: UK bonds extended a steep sell-off, with 10-year gilt yields reaching 4.93%, their highest since 2008, before easing to 4.84%, amid fears of stagnant economic growth and rising borrowing costs.
The numbers: The pound dropped 0.6% to $1.2239, its weakest since November 2023. The continued market rout reflects rising borrowing costs, persistent inflation and weak economic growth, threatening Labour’s slim £9.9 billion ($19.66 billion) fiscal headroom.
The context: Declining demand for gilts from pension funds has added pressure, Bloomberg noted citing UBS estimates.
Chancellor Rachel Reeves’ fiscal plans are under threat, as her £9.9 billion budgetary headroom is being squeezed by surging debt costs, which according to the FT exceed £100 billion annually.
Analysts have compared the sell-off to the crisis sparked by former Prime Minister Liz Truss’ “mini-budget” in 2022 but noted the situation is someway short of that event.
The current turmoil comes alongside a global bond sell-off fuelled by strong US economic data and rising Treasury yields.
What they said: “Markets are rightly nervous about depth of demand for gilts,” UBS strategist Giles Gale said. “Fixed income weakness has been a global theme, but sentiment on the UK is particularly vulnerable.”
“The worry is that investors have just lost faith in the UK as a place to put their assets,” Eva Sun-Wai, a fund manager at M&G Investments told Bloomberg.
She added the pound’s drop despite a surge in yields can be seen as a signal of capital flight, as normally higher returns would make a currency more attractive.
The sources: Bloomberg , The Financial Times
