Markets Fret Over UK Fiscal Situation
Difficult times ahead for Chancellor Rachel Reeves
UK fiscal strains are back in focus as long‑dated gilt yields surged to multi‑decade highs, sterling weakened, and the DMO sold a record £14bn 10‑year gilt; with an Autumn Budget now set for 26 November, markets are testing the government’s fiscal resolve.
What happened?
UK long bonds spiked: the 30‑year gilt yield pushed to ~5.72–5.75%, the highest since 1998, while 10‑year yields hovered around the high‑4s; sterling fell more than 1% at one point. The move came alongside a global bond sell‑off. At the same time, the Debt Management Office launched a new 4¾% 2035 gilt via syndication—its largest issuance event—raising ~£13.8bn cash on £14.0bn nominal with total orders of ~£141bn; year‑to‑date gilt sales reached ~£144.1bn against a £299.1bn remit. July public finances showed borrowing of £1.1bn (lowest July in three years) but cumulative borrowing of £60.0bn in FY‑to‑July (third‑highest on record), with public debt around 96% of GDP. The Bank of England continues active gilt sales from its QE portfolio, with a Q3 schedule across short, medium, and long maturities.
Why does this matter?
Higher debt‑servicing squeeze: Elevated yields lift the government’s interest bill—already around £105bn in 2024–25 on OBR projections—tightening room for manoeuvre as tax‑to‑GDP sits near historic highs.
Supply overhang and QT: The 2025–26 plan implies ~£299bn of gilt issuance plus net T‑bill supply, while the BoE is simultaneously selling APF gilts, adding duration to the market and potentially amplifying term premia.
FX and spillovers: Higher UK rates and fiscal jitters pressured sterling and contributed to equity wobble, underscoring how gilt volatility can ripple through broader UK risk assets.
Policy constraints into Budget: With the Budget fixed for 26 November and debt near six‑decade highs as a share of GDP, fiscal choices on taxes, spending, and investment will be judged against tighter market tolerance.
What’s the counterpoint?
The financing machine still works: July borrowing was below a year ago and year‑to‑date is broadly in line with OBR profiles; debt interest as a share of revenue remains below the pre‑2007 median, tempering the alarmist read‑through from headline cash numbers. And the record 2035 syndication drew ~£141bn of orders—evidence of deep demand even at higher yields—while the BoE has shown flexibility to tweak its sales cadence when volatility bites. Much of the rate move also reflects a global sell‑off, not UK idiosyncrasy alone.
finformant view
The UK’s challenge is less about market access and more about price and credibility: elevated term premia and heavy net supply will keep long yields sticky unless policy signals deliver a clearer, multi‑year consolidation-and‑growth mix. Expect issuance tactics (maturity mix, syndication use), BoE QT pace, and November’s fiscal arithmetic to drive whether 30‑year yields settle back—or entrench near late‑1990s levels.