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The British government on Thursday sought to calm turmoil in Britain’s bond market by vowing to stick to fiscal rules as borrowing costs hit their highest level since the financial crisis.
Darren Jones, No. 2 at the UK Treasury, told MPs that the 10-year gold yield had risen to 4.93%, the highest since 2008, and sterling had fallen accordingly, adding: “The UK gold market remains in an orderly fashion. It’s functioning,” he said. The currency rose 1% against the dollar, its lowest level in more than a year.
“There is no doubt about the government’s commitment to economic stability and fiscal health,” Jones said. “This is why meeting fiscal rules is non-negotiable.”
Mr Jones’ appearance came after Speaker Lindsay Hoyle accepted an urgent question from the Conservative opposition on the “increasing pressure of borrowing costs on public finances”.
Treasury Secretary Rachel Reeves is about to depart on a long-planned trip to China and has dispatched Jones, the principal secretary at the Treasury, to respond.
The yield on 10-year bonds rose by 0.12 percentage points, but government bonds rebounded and yields were flat on the day at 4.8%. Yields move inversely with prices.
Sterling was caught in a sharp selloff, dropping to $1.224, its lowest since November 2023, before partially recovering at $1.228.
” [the pound] “Gold reflects the deterioration in the UK’s fiscal outlook,” said analysts at Brown Brothers Harriman.
Britain’s borrowing costs have soared as investors worry about the government’s large borrowing needs and the growing threat of stagflation, a combination of lackluster growth and persistent price pressures.
Mr Jones insisted it was normal for gold prices to fluctuate and that underlying demand for UK government bonds remained strong.
“The most recent auction, which took place yesterday, had bids three times the asking price,” he said.
He said the Treasury was still working on a multi-year spending review scheduled for this summer, based on the assumptions set out in October’s Budget.
But he acknowledged that the Office for Budget Responsibility, the independent budget watchdog, published new forecasts on March 26 that could influence discussions with ministers.
Recent bond market tensions have also raised concerns about tax increases and spending cuts. The Ministry of Finance has indicated that it will cut spending rather than increase taxes if necessary.
Shadow chancellor Mel Stride, who raised the urgent question, said Mr Reeves himself should have appeared in parliament.
“Where is the Prime Minister?” he asked. “It is very unfortunate that in these difficult times with such serious issues, she herself is nowhere to be seen.”
He then called on Prime Minister Reeves to cancel his trip to China and “focus on this country instead,” calling on Labor’s “panicked attempt to reassure markets about an economic mess of its own making.” ” was criticized.
Chancellor Reeves left a tiny £9.9bn leeway for revised fiscal rules in last autumn’s budget, even after announcing a £40bn tax increase aimed at “wiping the slate clean” on the public finances. Ta.
The prime minister’s key fiscal rule is a promise to ensure that all day-to-day public spending is covered by tax revenue by 2029-30.
Since then, rising bond yields have threatened budgetary flexibility. The level of bond yields is a key factor in determining budget space, given its impact on the government’s interest bill of more than £100bn a year.
“Investors are looking for some guidance from somebody, and the government just said it’s OK,” said Tomasz Wiladek, chief European economist at T. Rowe Price. “The Bank of England will continue to do this as long as possible,” he added, adding that the move was not big enough to merit more than a verbal response from policymakers.
Analysts said the bond market could see another sell-off on Friday if U.S. Treasury yields rise and gold prices drag on as they closely monitor U.S. jobs data.
“If the employment data is strong, it could be a very tough situation for British bonds,” said Pooja Kumra, UK rates strategist at TD Securities.
Analysts said the simultaneous fall in gold and sterling was an echo of the backlash caused by Liz Truss’s 2022 “mini” Budget.
However, many investors believe the situation will fall short of the 2022 sovereign debt crisis.
“I expect things to start bottoming out… We’ve already seen a washout last year in gold stocks,” said Jeffrey Yu, senior strategist at BNY. “I’m not denying there are problems in the UK, but when you suddenly start comparing things to 2022, I think that’s what’s driving things forward.”
