The UK is facing a double whammy of economic stagnation and rising inflation, causing investor panic and pushing borrowing costs to their highest levels in decades.
Worries over the stagnating UK economy and accelerating inflation are unnerving investors, pushing borrowing costs to their biggest premium over German debt yields since 1990. The spread between the two countries’ bonds has risen above 2.3 percentage points, the highest since German reunification and eclipsing the peak reached after Liz Truss’s ill-fated “mini” Budget two years ago.
‘Stagflation concerns are back for the UK bond market,’ said Robert Dishner, senior portfolio manager at Neuberger Berman. He added that investors were also ‘a little on edge’ over the scale of the Labour government’s plans for borrowing, which could increase further if weak growth held back tax receipts. The gilt market moves come ahead of the Bank of England’s final policy meeting of the year on Thursday, with investors betting that persistent inflation will prevent the central bank from cutting its benchmark rate, despite the stagnating economy. Recent data showed GDP unexpectedly shrank for a second successive month in October. The rise in gilt yields has also taken government borrowing costs back close to the one-year high struck last month after chancellor Rachel Reeves’ October Budget, which briefly unsettled investors by stepping up the Treasury’s debt issuance plans. Ten-year gilt yields climbed as much as 0.06 percentage points to 4.58 per cent on Wednesday following figures showing that UK inflation accelerated to 2.6 per cent in November. ‘Higher borrowing costs continue to undermine the UK fiscal position,’ said Mark Dowding, chief investment officer at RBC Bluebay Asset Management. ‘If gilt yields blow above levels seen in the Truss tantrum, Rachel Reeves could end up breaking more promises and being forced to raise taxes or cut spending in order to allay concerns relating to debt sustainability.’ The recent increase in yields from less than 4 percent at the start of the week reflects the market’s growing unease about the UK’s economic outlook
UK ECONOMY INFLATION BORROWING COSTS INVESTORS STAGFLATION
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