The UK is currently seeing its government bond interest rates increasing in the financial markets, which could have significant impacts for the economy. UK government bonds, known as “gilts,” are typically considered secure with little risk involved in not repaying the amount borrowed, making them popular with financial institutions like pension funds. However, since August, the yields on UK government bonds have continued to increase. The yield on a 10-year bond is currently at its highest point since 2008, while the yield on a 30-year bond is the highest since 1998, meaning it will cost more money for the UK government to borrow over long-term periods.
It’s not just the UK seeing this trend. Japan, Germany, France, and the US have all seen their borrowing costs increasing. There are concerns over what will happen when US President-elect, Donald Trump, returns to the White House. Trump has stated his pledge to introduce tariffs on goods entering the US, in addition to tax cuts, which could lead to a persisting inflation rate. Investors are worried that interest rates will not come down as quickly as expected. Worries around the UK economy also exist, with inflation hitting 2.6% in November and the economy shrinking for the second month in a row.
The increase in UK borrowing costs may impact spending. The Chancellor, Rachel Reeves, has pledged that all day-to-day spending is going to be funded from taxes and not by borrowing. However, if more money is needed to pay back the higher borrowing costs, that decreases the tax revenue, making less money available to be spent on others. This could result in spending cuts impacting public services or even tax rises. If borrowing costs continue to rise, cuts to spending need to occur before the one fiscal event a year, where the government can raise taxes, which is not expected until the autumn.
In the mortgage market, there have also been concerns around the impact of the higher gilt yields. Although yields are currently higher than in September 2022, they have been slowly creeping up rather than skyrocketing over just a few days. Analysts and brokers suggest the current market unease is having an effect on mortgage pricing. Contrary to the expected falls in rates at the beginning of the year, lenders are holding off from making cuts to see where things go. However, the market is currently favourable for anyone purchasing an annuity. Retirement income is bought only once, and one annuity expert told the BBC that people would probably receive a better deal now than at any time since 2008
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