UK borrowing costs have spiked amid a global bond rout – just as Andy Burnham stood by his notorious assertion that Britain should be less ‘in hock’ to bond markets.
Yields on ten-year UK bonds, known as gilts, leapt from 5.24 per cent to 5.35 per cent on Wednesday in the biggest one-day jump for three weeks.
They rose again to more than 5.38 per cent on Thursday. Bond yields rise as their prices fall – pushing up borrowing costs for the Government as well as households and businesses who face higher rates on mortgages and corporate loans.
Jitters on bond markets partly reflect nerves over Mr Burnham’s spending plans. Ten-year gilt yields were less than 5 per cent just before he became PM and have since touched levels not seen since 2007.
But the moves also reflect global factors. This latest sell-off is happening at the same time as a surge in US bond yields driven by rising oil prices and fears of more US interest rate increases.
Higher borrowing costs will create a headache for Chancellor John Healey at next month’s Budget.
Mr Burnham had previously spooked bond markets in the run-up to last year’s Labour party conference amid speculation that he would unseat Sir Keir Starmer.
Back then, his comments about not wanting to be ‘in hock’ to the markets were interpreted as a troubling sign of disregard for the investors who finance Britain and could bankrupt the country if they turn against it.
Then chancellor Rachel Reeves said at the time that while she would also likely to be less in hock to bond markets, ‘we rely on those bond markets and those people participating in them to buy our debt’.
In a new interview with the New Statesman, however, the PM said his original remark had been taken out of context by Sir Keir’s team.
‘I mean, the point about the bond markets, it holds – in that what I was saying was the country has left itself over-exposed,’ he said.
Andy Burnham said his previous remarks about bond markets were taken out of context
Mr Burnham argued that he was not calling for spending restraints to be abandoned, but rather making the case for ‘a much more streamlined, productive state’.
He added: ‘They couldn’t understand why I was saying some of the things that I was saying.
‘[They] didn’t know what to do with it, but they did what they always do, which is they pulled one line out of it and then framed that one line within their world, rather than the one that I was talking about.’
The bond market ructions are feeding through to higher mortgage rates – with analysts warning of worse to come.
Figures from Moneyfacts show the average two-year fixed rate mortgage now stands at 5.92 per cent, the highest since July 2024, while a typical five-year fix is at 5.96 per cent, a level last seen in October 2023.
Borrowing costs have risen sharply in recent months as investors bet interest rates will have to rise to tame rampant inflation fuelled by the Iran war and spike in oil and gas prices.
UK bonds have been hit particularly hard amid concerns that Labour is unwilling to take tough choices on spending – and will instead borrow even more to fund their lavish plans.
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Official figures this week laid bare the impact of rising borrowing costs on the Government’s finances with debt interest payments hitting a record high of £8.8billion last month – the highest bill for August on record.
That took interest payments on the near £3trillion national debt to £50billion for the first five months of the fiscal year – or £327million a day.
The surge in interest payments piles pressure on Mr Burnham and Mr Healey ahead of next month’s Budget.
It is feared he will be forced to borrow yet more money – or hammer the economy with ever higher taxes – to fund Labour’s spending plans.
Analysts warned this risks fresh turmoil on the bond markets – pushing up borrowing costs for the government, households and businesses.
It is now thought that the Prime Minister and Chancellor may opt for less fiscal headroom in next month’s Budget to limit tax rises and avoid spending cuts.
Even as analysts warned ‘bond yields are blowing out again’, reports suggested Mr Burnham and Mr Healey are looking at setting a lower buffer than the £24billion forecast in March.
Having seen the headroom eroded by higher interest rates and a ballooning welfare bill, it is thought they could settle on around £14billion in the Budget on October 28.
This would allow them to temper tax rises and spending cuts – but risks spooking the bond markets at a time when the UK government already pays more to borrow than any other G7 country.
Neil Wilson, an investor strategist at Saxo Markets, said: ‘Bond yields are blowing out again.
‘Gilt market participants may have had an eye on the prime minister, Andy Burnham, making the kind of comments you kinda wish he just wouldn’t make. He said he stands by his view that the UK is “in hock” to the bond market. There is this cognitive dissonance where he says we are at the mercy of the bond market but shouldn’t be – like it’s something the government cannot control.’
He added: ‘This morning a test balloon is being flown with a report that the Chancellor would be comfortable with reducing the fiscal headroom in order to avoid more tax hikes. It’s likely the roughly £24billion of headroom left by Rachel Reeves in March has been halved by the spike in bond yields, which would ordinarily require tax hikes to offset.
‘The balloon being floated is that Healey would just accept less headroom and the bond market would be totally fine with this, which I very much doubt.
‘The key will be that the underlying fiscal plan underpinning a Budget with less headroom is credible, but I would think that the gilt market has a low threshold for this kind of thing. It’s not messing with the fiscal rules as such, but it would undermine confidence the government can stay within them and would signal a deeper issue; that they are not willing to take tough decisions on welfare spending.’
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