If much of the UK mainstream press is to be believed, UK chancellor Rachel Reeves has "fired up the Quattro" and driven the Gilt market back to late 2022. However, this time, the UK is not alone in facing rapidly climbing govvie yields.
Gilt yields have risen since Rachel Reeves presented her maiden budget in September, the first under a Labour government since Alistair Darling delivered his last in March 2010, just 44 days before UK went to the polls.
The September low for the 10 year Gilt was 3.75% but by Tuesday close it was yielding 4.88%, according to Tradeweb.
Fears of increased borrowing following the September budget has rippled through investors. And now, the prospect of tepid economic growth and sticky inflation has compounded these concerns.
The mainstream media and opposition parties have responded by piling the pressure on Reeves, with repeated calls for her resignation. Shadow chancellor Mel Stride told parliament on Tuesday that “this whole sorry tale, is nothing short of a Shakespearean tragedy”, prompting bouts of laughter from Reeves and her peers.
"This whole sorry tale, is nothing short of a Shakespearean tragedy," Mel Stride tells MPs "To go, or not to go, that is now a question... the British people deserve better," the shadow chancellor adds as he attacks Rachel Reeves recordhttps://t.co/EZa981EvHW pic.twitter.com/3wTUabbKm5
— BBC Politics (@BBCPolitics) January 14, 2025
To shore up confidence in the Gilt market, Reeves has since talked up the prospects of UK PLC — vowing to go “further and faster in our plan to kickstart economic growth that plunged under the last government”.
However, the prospect of “limited fiscal wiggle room” in this year’s budget “suggests [Reeves] may have to announce a tightening of fiscal conditions as soon as March, though this would weigh on the UK growth outlook further,” said researchers at Rabobank this week.
Turn back time
The rapid rise in Gilt yields and the associated media furore has brought back memories of September 2022, when former UK prime minister Liz Truss and her chancellor Kwasi Kwarteng sparked a sharp sell-off with a mini-budget stuffed full of unfunded tax cuts.
The mini-budget sparked a crisis, sending Gilt yields through the roof and forcing the Bank of England to purchase paper to shore up the market. Truss later stepped down after 49 days in office, making her the UK’s shortest serving prime minister.
And 28 months later, members of GlobalCapital’s editorial team are once again replying to fearful questions from family members over the health of the UK economy and government debt.
However, it seems that this time, things are different. UK Gilt yields are not alone in climbing over the last few months. In fact, Gilt yields have moved in near tandem with US Treasuries, German Bunds and French OATs. The rise in Gilt yields, is perhaps, more reflective of a general sell-off in government bonds globally.
If, as the papers claim, investors are so concerned about the long-term health of the UK economy and looking to offload their Gilt holdings, then why are yields in the US, Germany and France climbing at a similar rate? Does Rachel Reeves have so much power that the impact of her budget plans has spilled over into neighbouring economies?
Concerns over growth, stability and inflation have permeated government bond markets across the developed world.
Germany is skirting close to a recession while also facing a snap election on February 23 — the collapse of the incumbent governing coalition in November sent Bund yields upwards, piling pressure on euro SSAs and shuttering the covered bond market.
In France, president Emmanuel Macron is grappling with political uncertainty of his own after a snap election in June last year, which did little to allay warring factions. Meanwhile, the country's budget deficit is spiralling.
And in the US, president-elect Donald Trump is days away from starting his second term, which threatens to bring tariffs and an isolationist policy stance — plus the annexation of Canada, Greenland and the Panama Canal.
The mainstream press and opposition parties might be well placed to listen to former Tory chancellor Kenneth Clarke, who came to the defence of Reeves on BBC Radio 4's PM show on Monday — “if you look around the world, the French, the Germans all have, slightly different, serious economic problems [...] and you can't blame the first six months of the Labour government”.
Sterling still shines
However, the primary market paints a more positive picture of sterling sentiment. As Rachel Reeves faced a grilling from the UK parliament on Tuesday, Coventry Building Society bucked any uncertainty to seal a tightly priced Sonia-linked covered bond.
The UK building society garnered £1.1bn of final orders for its £600m January 2030 floater, belaying concerns that sterling is not an attractive proposition for investment.
Meanwhile last week, when 30 year Gilts crept towards their highest levels since 1998, SSA issuers like the EIB or KfW were able to secure some of the largest deals in the currency away from the Gilt market in recent years.
In fact, over the first six trading days this year, issuers pushed through £13.7bn — the largest ever volume issued across the sterling bond market this early in the year, according to data from GlobalCapital’s Primary Market Monitor and Dealogic.
Of course, the next test will come when the UK brings its first syndicated deal of the year — a reopening of its 4.375% January 2040 Gilt, which is scheduled for next week. As of Tuesday evening, the note was bid at a yield of 5.25%, according to Tradeweb.
Tuesday’s £1bn 1.25% November 2054 index-linked Gilt auction, meanwhile, attracted strong demand, with the auction 3.1 times covered. While last week, the first conventional Gilt auctions of the year — sales of the 4.375% July 2054 and 4.375% March 2030 bonds — were 2.75 times and 3.0 times covered, respectively.
Investors still have confidence in the UK — at these levels at least.