UK bonds have hit a 25-year high – here's what that means for the economy
- Written by David McMillan, Professor in Finance, University of Stirling
It’s been more than a year since the UK economy was thrown into crisis after then-prime minister Liz Truss suggested making a wealth of unfunded tax cuts[1] in her September 2022 mini-budget. But a recent bond market sell-off has now sent borrowing costs rocketing again, pushing the bond market even higher than after Truss’s announcement.
Yields on UK treasury bonds – the rate the UK government must pay to borrow money – have risen to approximately 4.6% for ten-year bonds. Yields on 30-year bonds hit 5.1%, the highest since 1998.
Banks also use this rate as a key benchmark to set commercial loan rates, so this means borrowing costs are rising for businesses, as well as for the government. Two-year and five-year treasury yields (which are used to set mortgage rates) are also above the budget-fuelled high of last year, and at levels not seen in over ten years.
UK bond yields (30 year), 1998-2023:
Twelve members of the Fed’s 19-person rate-setting committee expect one more 0.25% interest rate hike this year, while 7 FOMC members expect no change before the end of the year.
Statista, CC BY-ND[13][14]
What has this got to do with bond yields?
The expected rise in US rates means investors do not want to hold US bonds whose value will fall as a result. As explained before, when newer bonds are issued at higher yields (to reflect the bank’s most recent interest rate decison), existing bonds (those previously issued with lower yields) will be valued less by investors because they will get less in interest payments for holding them.
This is why investors are selling US bonds. For a related, but slightly different reason, investors also don’t want to hold UK bonds. As US bonds will soon earn a higher yield, investors are selling UK bonds to reposition their portfolios towards the US, where they will be able to earn a higher yield.
This also has implications for the value of the pound. Since the Bank of England’s decision not to raise the interest rate in September, the value of the pound has fallen[15] versus the US dollar. This is because the same investors that are selling UK Treasuries and driving up yields, are also selling pounds to buy US dollars.
The UK is not alone in feeling this effect, the euro is also weakening and against the US dollar, while the Japanese yen is close to the same low that prompted an intervention by the Bank of Japan[16] around this time last year.
