The UK’s 30-year borrowing costs climbed to their highest point since 1998, while the Pound fell over 1% on Tuesday, reflecting increasing investor concerns about the country’s fiscal stability.
The decline in British government bonds, or gilts, occurred alongside a wider selloff in major bond markets, as attention returns to rising debt levels.
However, the Pound’s decline, on track for its largest one-day drop since 17th June, underscored the vulnerability of UK markets amid growing worries over governments’ ability to maintain fiscal discipline, Reuters news agency reports.
“The UK has had a perilous (fiscal) backdrop and that's going to continue,” according to Lloyds FX strategist Nick Kennedy.
“Over the summer, there has been a bit of a risk premium built into the rates market. Investors are now wanting more of a risk premium for Sterling as well.”
In addition, 30-year gilt yields reached 5.69%, rising five basis points, their highest level since May 1998.
Meanwhile, Sterling fell 1.2% to $1.33 and was nearly 0.7% weaker against the Euro, trading at 86.98 pence per Euro.
It was the weakest-performing G10 currency against the Dollar by a significant margin.
Furthermore, Chancellor Rachel Reeves is expected to introduce tax increases in her Autumn budget to stay on track with fiscal targets, which could further complicate efforts to accelerate economic growth.
Also, Prime Minister Keir Starmer reshuffled his team on Monday as part of efforts to strengthen his administration ahead of what is expected to be a challenging end to the year.
“While a repricing of Bank of England expectations had helped Sterling last month, the UK is going to be vulnerable to fiscal risks as the Autumn budget approaches, which is likely to remain a headwind for Sterling,” stated Jane Foley, head of FX strategy at Rabobank.
Moreover, Britain isn’t the only country facing fiscal scrutiny.
France’s 30-year government bond yields jumped to their highest levels in more than 16 years on Tuesday amid fiscal concerns, as Prime Minister François Bayrou started talks with political parties to avert a government collapse.
The recent bond market selloff coincided with Britain’s sale of a 10-year gilt through a syndicate of banks on Tuesday.