UK borrowing costs rise as chancellor Rachel Reeves goes ‘tight’ on spending plans

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The UK’s long-term borrowing costs have risen sharply, on investor concerns about the Labor government’s Budget, pushing the gap with Germany to its widest in more than a year.

Three more weeks to go Rachel Reeves’ first budgetBondholders say the British Prime Minister will have to walk a tightrope if she wants to continue with her borrowing and investment plans without triggering a gold sell-off.

The spread between benchmark British and German 10-year bond yields has widened to 1.94 percentage points, the highest since August 2023, investors said, on fears Reeves will increase debt as well as concerns about persistent inflation.

“Financial markets will not have much room to borrow more,” said Mark Dowding, chief investment officer at RBC BlueBay Asset Management.

“Rachel Reeves needs to walk a tightrope, otherwise the gold-plated market will limit her ability to deliver much of the Labor agenda.”

Amid reports that the prime minister is planning to relax Her borrowing rules To fund the investment boost in the October 30 Budget, the 10-year gilt yield rose from 3.75% in mid-September to 4.2% on Tuesday.

Dowding added that memories of the 2022 “mini” Budget, when former chancellor Liz Truss’ unfunded borrowing plans spark The panic in the bond market is still “deeply rooted in the psychology” of gold-plated investors.

Reeves is pushing for tax increases to plug what she describes as a £22 billion gap in day-to-day government spending.

She has scaled back plans to raise taxes on NGOs, despite an explicit pledge to stay away from hit private equity employees with a top tax rate of 45p after the Treasury warned that such measures could be counterproductive.

UK public debt has exceeded forecasts this year, partly due to higher-than-expected spending, and some analysts predict the government will have to sell more sows in the financial year to March 2025 compared to current forecasts of £278 billion.

The Prime Minister tried reassure worried investorstold the Financial Times on Friday that she is not in a “race to make money from the get-go” and that she will set up “guardrails” to ensure public money is well spent on investments reasonable.

Tomasz Wieladek, chief European economist at asset manager T Rowe Price, said such guarantees were important to “give investors certainty about future gilt issuance ” if the government changes loan regulations.

He added that the risk of larger-than-expected gold issuance in coming years is a key factor pushing up UK borrowing costs.

Investors said the growing gap with German bond yields is also due to expectations that the European Central Bank will interest rate cuts faster than the Bank of England to boost the stagnant Eurozone economy.

Relatively poor sow performance is “a reflection of both [interest rate] said Emmanouil Karimalis, strategist at UBS.

However, BoE governor Andrew Bailey said last week that interest rate setters in the UK could “a little more aggressive” in reducing borrowing costs if inflation continues to decline.

While his comments increased short-term government debt, longer-term debt – which is often more sensitive to government borrowing plans – continued to weaken.

Financial rule changes discussed in the Treasury include reducing the impact of losses incurred on the BoE’s gilt portfolio and removing liabilities linked to investment vehicles such as GB Energy is launched by Labour.

Reeves said at the Labor Party conference she would put an end to “low investment causing supply to fall” – widely seen as suggesting the government could also adjust its debt target to take more into account assets and liabilities of the public sector.

The government’s bid to overhaul its fiscal framework won the backing of an influential think tank on Tuesday as the Institute for Public Policy Research recommended it scrap the debt requirement Labor decreases from year 4 to year 5 according to forecast.

It said Reeves would have gained around £57 billion in “headroom” – or the ability to borrow to invest – if she had instead used a separate measure called “public sector net worth” covers a much wider range of assets.

The report argues that some additional headroom should be retained as a cushion against an uncertain economic outlook.

The Treasury said: “The Prime Minister has said that the Budget will be built on a foundation of economic stability, including the strong fiscal rules set out in the manifesto. These include moving the current budget to a balanced state so that day-to-day expenses are met by revenues and the share of debt in the economy is reduced by the fifth year.”