The UK bond market has sent a powerful and painful warning shot across the bow of Prime Minister Keir Starmer’s government, as the yield on long-dated debt surged to its highest level in more than a quarter of a century.
The dramatic move, part of a global sell-off, is tightening a fiscal straitjacket around the administration, amplifying pressure for painful tax rises or spending cuts ahead of a critical autumn budget.
The rate on 30-year gilts climbed to 5.67 percent on Tuesday, a level not seen since 1998, while 10-year yields also rose to 4.78 percent.
The pound weakened on the news, a clear sign of faltering investor confidence as the government’s borrowing costs continue their relentless ascent.
A fiscal straitjacket ahead of the autumn budget
This surge in borrowing costs is far more than a statistical curiosity; it is a direct and immediate headache for Chancellor of the Exchequer Rachel Reeves.
She is now under intense pressure to find a way to improve the UK’s fiscal position, a task made politically perilous by a recent and embarrassing U-turn on welfare reforms that exposed deep divisions within the ruling party.
The government is now at the mercy of the bond market, with economists warning that it will soon need to raise taxes to stay on the right side of its own self-imposed fiscal rules. The room for maneuver is shrinking rapidly.
“Tax rises are inevitable, but we are reaching a stage where further tax rises could become counterproductive,” Mohit Kumar, chief European strategist at Jefferies International, told Bloomberg.
We remain negative on the UK long end and continue to favour steepeners along the curve.
(Courtesy: Bloomberg)
The global undertow
While the UK’s fiscal woes are a key domestic driver, the country is also at the epicenter of a much larger global storm. The move in gilts is part of a broader, worldwide slide in long-maturity government debt.
This global selloff reflects a fundamental shift in the market, with waning demand for these securities from traditional buyers like pension funds, a change compounded by deep-seated concerns that the world is entering a new era of structurally higher inflation.
A desperate reset in Downing Street
The immense pressure from the market appears to have been a key catalyst for the Prime Minister’s recent actions.
In a clear bid to regain control of the economic narrative and reassert his government’s authority, Starmer announced a raft of changes to his Downing Street team on Monday.
The reshuffle is seen as a direct attempt to secure more influence over economic policy at a time when global market forces are threatening to dictate the government’s agenda.
The stage is now set for a tense autumn, with a cornered government caught between the unforgiving logic of the bond market and the treacherous realities of domestic politics.
