By Alun John, Harry Robertson and Naomi Rovnick
LONDON (Reuters) – British markets are among the biggest victims of a global bond selloff that has spilled over into currencies and stocks this week.
Yields on long-dated British government bonds are at their highest in decades – putting government finances under pressure – while sterling is struggling and British domestic stocks are underperforming.
Britain’s Treasury says it will maintain an “iron grip” on the public finances and Treasury minister Darren Jones told parliament the UK bond markets “continue to function in an orderly way.”
Here are six charts setting out the market impact.
GILTS DUMPED
Benchmark 10-year government bond yields surged more than 30 basis points in three days to hit 4.925% on Thursday, their highest since 2008, although they later fell back in calmer trading.
There was little obvious trigger for the move, which kicked off Tuesday and accelerated Wednesday, but Emmanouil Karimalis, rates strategist at UBS, said Britain’s high borrowing levels and the Bank of England’s persistent concerns about inflation were factors.
He noted Britain’s government is borrowing roughly 20 billion pounds ($24.55 billion) more in the first quarter than last year.
That represents a front-loading of the roughly 300 billion pounds the government is seeking to borrow through gilt markets this year, the second highest on record behind the pandemic year of 2020-21.
“It’s obviously not a helpful factor, especially for longer-dated gilts,” Karimalis said.
“It seems like the market thinks the UK is somehow losing fiscal credibility.”
STERLING SLUMPS
The pound tumbled to a 14-month low against the dollar on Thursday on fears surging UK borrowing costs will force government spending cuts and slow the economy. It has also lost ground against the euro.
Traders are braced for a wild ride in sterling, and one-month implied volatility – a measure of expected price swings – has spiked to its highest since March 2023.
Sterling may replace the euro as traders’ currency of choice to sell short against the dollar, which is surging on expectations of strong U.S. growth and high interest rates, Societe Generale (OTC:SCGLY) chief FX strategist Kit Juckes said.
“We’ve seen a spike higher in (gilt) yields immediately prompting lots of debate about whether we are going to need earlier fiscal tightening, which is going to further slow the economy.”
“That has got volatility picking up because it is a change of direction (for the pound).”
STOCKS STRUGGLE
The bond selloff has spilled over into stocks too.
“You saw smaller companies in the UK get hit particularly hard,” said Iain Barnes, chief investment officer at Netwealth.
“Anything that’s trading off the confidence in the UK market combined with interest-rate exposures, has really struggled, so we’re avoiding those areas completely.”
Britain’s midcap FTSE250 index, which includes consumer, real estate, and financial firms that make a high proportion of their revenues in Britain, is down over 3% this week so far, already its biggest weekly drop since August.
In contrast, the more international FTSE100 blue chip index and the broad European stocks benchmark are both up around 1%.
Homebuilders, which typically suffer from higher bond yields as they push up mortgage rates, have fallen over 7% this week.
The macro economic picture is not solely to blame for the weakness in British stocks though. Shares in big retailers have been slumping on disappointing Christmas trading updates.
FISCAL PROBLEMS
Market selloffs can pose a challenge for governments at the best of times. But the bond aspect is increasing the pressure on Britain’s finance minister Rachel Reeves, and could force her to cut future spending.
The problems in part stem from Reeves’ first budget speech in October, in which she gave herself only a small margin of error for meeting her target of balancing spending on public services with tax revenues by the end of the decade.
Higher gilt yields, as well as Britain’s sluggish economy, means Reeves might already be off course.
“The growing likelihood that the Chancellor will miss her main fiscal rule suggests further spending restraint and/or tax rises may be unveiled in 2025,” said analysts at Capital Economics.
“That could act as a bigger headwind to economic growth.”
($1 = 0.8145 pounds)