There is a lot of noise currently about UK government borrowing costs.
The focus has been on what is known as the 30-year gilt yield, which is the effective interest rate of what it would cost the UK government to borrow money over three decades.
This rate reached a 27-year high on Tuesday, which some argue is a verdict on economic mismanagement and fiscal credibility. The bond vigilantes are striking, and this is the ultimate harbinger of doom.
Is there a link to the mini reshuffle of Downing Street personnel from Number 11 to Number 10 on Monday?
For others analysing market moves, it is a pan-European trend, and if anything, a sign of UK growth outperformance, meaning there is less room to cut interest rates.
It is worth quickly unpacking what this measure represents.
This is about trading on financial markets of a very long-term form of UK government debt – essentially loans taken out for 30 years.
Demand for these assets goes up and down, setting the price, which in turn affects what is known as the yield, a measure of the effective interest rate facing the government.
It is that 30-year gilt yield that has hit a new 27-year high after creeping up over the summer.
The UK is not alone in this. Other European countries have also seen such records set in recent days.
The time period for these loans is quite important in determining the overall impact on the economy.
The 30-year gilt is important in sectors requiring long-term returns: pensions and insurance. Ultra long government loans are especially important for defined benefit pensions systems, which need fixed and predictable payouts over long periods.
One of the reasons why this has affected a series of European countries has been structural changes in pensions markets that is reducing the demand for such long-term debt.
But some general doubts about the political and economic sustainability of tax and spending plans in Europe is also part of the context here.
There are two critical differences to what happened, for example, at the infamous mini-Budget of three years ago.
Firstly the rise in yields at that point was more rapid. Secondly, back in 2022 UK government debt across a series of time frames (known as maturities) was affected.
Two-year and five-year government loans have a direct influence on fixed-rate mortgages of the same time frame. The mortgage market reacted in real time to the UK-specific sudden crisis. So far, this year, the cost of mortgages has continued to fall.
Only 30-year mortgages might be impacted by the record set today, but they remain exceptionally rare in the UK.
The 10-year gilt is the benchmark for government bonds, and that was up a bit on Tuesday as well, but remains below the highs set earlier this year. There was no lack of appetite from markets however for the debt, banks put in £140bn of bids for £14bn in debt this morning.
There is, however, one factor in common with 2022. These important markets also have half an eye on the Bank of England. In particular, this month the Bank will set out its plans for the sell-off its own stock of government debt, amassed over years.
The reality is that with both the Treasury and the Bank auctioning off truckloads of these debts, there is a lot to digest, and markets will remain skittish, against the backdrop of multiple diplomatic, trade and political uncertainties.
The moves in the 30-year gilt are a warning sign of bond sharks scenting some blood in the water.
Some of it might be heading toward Paris in the coming days where ministers are publicly warning of an IMF crisis amid unremitting political uncertainty.
The smaller moves in the 10-year gilt can impact more directly the chancellor’s room for manoeuvre at her upcoming Budget. The lack of movement at shorter time frames means there is limited direct impact on UK household finances, for now.
This would be, however, pretty much the worst time for the government to show division, lack of certainty and credibility. Markets have long memories when governments fail to pass their announced Budget measures, especially when it arises surprisingly within administrations with thumping majorities.
Some traders identify the move of the chancellor’s deputy, Darren Jones, and other Treasury officials to Number 10 on “Transfer Deadline Day” yesterday as a sign that Reeves’s control is weakening. Others may see a more coherent operation between the two Lords of the Treasury.
All of this raises the stakes for the chancellor’s challenge of delivering both credible tax and spend plans, as well as jump-starting growth at her upcoming Budget.
