- Waning gilt demand piles pressure on Chancellor ahead of November Budget
- Rachel Reeves may need spending cuts and tax hikes to meet fiscal rules
Borrowing costs jumped on Thursday after an auction of UK Government debt was shunned by many global investors.
It marks another blow to the Government ahead of November’s Autumn Budget as investors appear increasingly sceptical of Chancellor Rachel Reeves’ ability to get Britain’s fiscal affairs in order.
The Debt Management Office said it sold £1.25billion of government bonds, or gilts, maturing in 2034, with a yield of 4.5 per cent and a bid-to-cover ratio – a measure of market demand – of 2.9 and an average yield of 4.584 per cent.
Demonstrating how investor demand has softened, July’s £1.5billion sale of this bond drew a cover ratio of 3.32 and an average yield of 4.553 per cent.
The result pushed gilt yields – the interest paid on government debt – higher across all durations, with 10- and 30-year yields up by 5 basis points each.
It means 10-year yields have added 73bps over the last 12 months to 4.72 per cent, while 30-year yields have soared 97bps to 5.54 per cent.
Further pressure on Chancellor ahead of November budget as borrowing costs continue to rise
Lale Akoner, global market analyst at eToro, said the auction result ‘shows investors are losing patience with uncertainty’ and ‘the market is far from convinced by Reeves’ plans, meaning volatility could persist until the Budget provides clarity’.
He added: ‘The Budget will need to deliver credible fiscal tightening, otherwise the UK risks testing investor confidence further. For income-focused investors, high yields may be tempting, but the risk is that further fiscal slippage pushes borrowing costs even higher.’
Long-term gilt yields had eased back from record highs in the summer, but have now erased all progress over the last month.
Gilts have sold off more recently as Government borrowing have smashed expectations and the Bank of England has damped hopes for further interest rate cuts next year.
Tony Whincup, head of investment specialists at TrinityBridge, said: ‘Despite tax receipts increasing, higher spending and debt interest costs outstripped the higher income.
‘Public finance data can be volatile on a month-to-month basis, meaning such upward pressure may not persist into the medium to longer-term.
‘However, the latest data is likely to further heighten the need for tax hikes if the Chancellor is to sufficiently plug the fiscal hole to keep to her self-imposed rules.’
Kate Marshall, lead investment analyst at Hargreaves Lansdown, added: ‘The government is currently under pressure to borrow more, and we could see spending promises in areas like energy and infrastructure. This could mean more gilts being issued in the years ahead.
Meanwhile, economic growth is stagnating and inflation, currently at 3.8 per cent, is still above the BoE’s 2 per cent target. This makes life harder for both the government and BoE.
‘Cutting interest rates or increasing spending could help stimulate the economy, but risk fuelling inflation. And holding back could keep inflation in check, but stifle growth.’
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This article was originally published by a www.dailymail.co.uk . Read the Original article here. .