UK Long Term Borrowing Costs Rise to Highest Level in 25 years
(20 October 2023 – United Kingdom) 30 year British government bond yields jumped to their highest in more than 25 years driven by geopolitical tensions, higher oil prices and inflation.
Unlike the crisis of October 2022 when British government bond yields spiked more sharply than other markets in response to abrupt fiscal decision made by new Prime Minister Truss, the latest change is in line with a global move.
The yield on the benchmark 30-year gilt rose as high as 5.134 percent on Friday, up five basis points on the day to its highest since September 1998 according to LSEG data, pushing past a previous peak of 5.115 percent set on Oct. 4. Ten-year gilt yields were two basis point higher on the day at 4.69 percent, not far off a 15-year high of 4.755 percent set on 17 August.
The UK’s long-maturity bond price slide sending yields to the highest levels since 1998 is predicated on the view that the Bank of England (BoE) will be forced to keep borrowing costs higher for longer. While the average maturity of British government debt is longer than other advanced economies at eight years, the BoE’s quantitative easing (QE) program has made the cost to the Treasury more sensitive to short term moves.
“Looking ahead, we still expect one more interest rate hike and further expect that UK monetary policy will have to remain in restrictive territory for some time before cuts could be considered. This is unlikely to be feasible until well into the second half of 2024, if not later” Cardano Senior Economist, Shweta Singh commented last month.
“In the weaker growth environment that we expect, both in the UK and abroad, government bond allocations will prove to be a valuable diversifying offset to equity market investments for defined benefit pension scheme investors’ growth portfolios” Singh added.
"Markets remain unsteady and investors undecided, as rising Middle Eastern tensions and bond yields threaten to undermine any thoughts of an immediate rally," said Interactive Investor Head of Markets, Richard Hunter.
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