Former U.K. Prime Minister Liz Truss warned on Sept. 2 that rising government debt and borrowing costs could eventually force Britain to introduce emergency spending cuts.
Summary
- U.K. 10-year gilt yield reached 5.268%, its highest level in approximately eighteen years on Wednesday.
- Thirty-year borrowing costs remained near 5.9%, increasing pressure on Britain’s upcoming October budget calculations further.
- Liz Truss warned that rising debt could eventually force emergency spending cuts across Britain’s government.
- Higher yields reduce bond prices and can increase projected debt servicing costs for Britain’s Treasury.
- Bitcoin traded near $76,500 after retreating from $81,000, remaining above levels recorded before Treasury intervention.
Her comments came as the yield on the benchmark 10-year U.K. government bond reached 5.268%, its highest level in approximately 18 years. The 30-year gilt yield remained near 5.9%, around its highest point since 1998.
“Global bond yields are spiking due to mountains of debt and the U.K. is one of the worst examples,” Truss said. She attributed the pressure partly to money creation by the Bank of England and what she described as currency “debasement.”
Those statements represent Truss’s interpretation of the market. Bond yields reflect several factors, including inflation expectations, economic growth, government borrowing, monetary policy and investor demand. The latest increase has also coincided with rising oil prices and a broader international bond selloff.
UK bond yields raise October budget pressure
The increase in U.K. bond yields matters because it raises the rate at which the government may need to refinance maturing debt or issue new bonds. It can also increase projected interest costs used in official fiscal forecasts.
Bond prices move in the opposite direction to yields. When investors sell existing bonds, their prices fall and their effective yields rise relative to the bonds’ fixed payments.
The U.K. Treasury does not immediately refinance its entire debt stock when yields increase. The effect passes through gradually as bonds mature and new debt is issued. Inflation linked government bonds can create additional pressure because their payments rise with inflation.
The 10-year gilt yield stood at 5.268% on Wednesday, while five-year borrowing costs reached approximately 4.75%. The 30-year yield remained close to 5.9%.
Economists at Pantheon Macroeconomics estimated that higher borrowing costs could reduce the government’s fiscal headroom from about £23.6 billion at the previous Spring Statement to approximately £13 billion. That is an external estimate rather than an official Treasury or Office for Budget Responsibility calculation.
The government is due to present its budget on Oct. 28. Updated forecasts will determine whether ministers need to raise taxes, reduce planned spending or change other policies to meet their fiscal rules.
Emergency spending cuts remain a Truss forecast
Truss said economic growth combined with restrained spending offered the best route through the debt problem. However, she warned that “the situation has gone too far” and Britain could face “imposed emergency spending cuts.”
No emergency spending package has been announced. The current government has not confirmed that it will adopt the course described by Truss.
The final fiscal position will depend partly on the period used by the Office for Budget Responsibility to calculate market based interest assumptions. Yields could rise or retreat before those calculations are completed.
Truss’s intervention also carries political context. Her government introduced approximately £45 billion of largely unfunded tax cuts in September 2022 without an accompanying OBR forecast.
The announcement caused a rapid selloff in long dated gilts and instability among pension funds using liability driven investment strategies. The Bank of England responded with temporary bond purchases to restore orderly market conditions.
The 30-year gilt yield rose from about 3.38% when Truss became prime minister to almost 5% during the market turmoil. Most of the tax measures were later reversed, and Truss resigned after 49 days in office.
Current yields are higher than the peaks recorded during that episode. However, the present move is part of a global repricing rather than a direct response to a single U.K. policy announcement.
Global bond selloff reaches the U.S. and Europe
Government borrowing costs have also increased across the U.S., Japan, Germany and France. The benchmark 10-year U.S. Treasury yield reached approximately 4.81%, its highest level since November 2023.
Longer dated U.S. yields have returned toward levels recorded before the Treasury expanded its bond buyback program in August. The 10-year yield initially fell to approximately 4.62% after the announcement but later reversed that decline.
Rising oil prices have added to inflation concerns. Brent crude briefly approached $95 per barrel as fighting between the U.S. and Iran threatened energy supplies.
Higher energy costs can keep consumer inflation elevated, potentially limiting central banks’ ability to reduce interest rates. Expectations that rates will remain high for longer can reduce demand for existing bonds carrying lower fixed payments.
The global nature of the selloff makes it difficult to attribute the U.K. move solely to domestic debt or Bank of England policy. Britain’s inflation exposure, large refinancing needs and fiscal rules may still make its public finances particularly sensitive to sustained increases in yields.
Bitcoin retreats as yields pressure risk assets
Bitcoin traded near $76,500 on Sept. 2, down about 2% over 24 hours. It had previously climbed from approximately $64,000 to a recent high above $81,000 before losing momentum.
Gold followed a similar reversal. The metal climbed toward $4,700 per ounce but later retreated to approximately $4,300.
Bitcoin and gold are sometimes presented as protection against currency depreciation or excessive government borrowing. Their recent declines show that the relationship is not consistent over short periods.
Higher government bond yields can make interest paying assets more attractive relative to Bitcoin and gold, which do not produce fixed income. They can also reduce demand for riskier assets by tightening financial conditions.
As previously reported, rising oil prices and higher bond yields outweighed Bitcoin ETF inflows as BTC fell below $77,500. Bitcoin nevertheless remained above its main daily moving averages following its August rally.
The U.K.’s next confirmed milestone is the Oct. 28 budget. Until the government and OBR publish updated forecasts, claims that emergency spending cuts are unavoidable remain unconfirmed.
Disclosure: This article does not represent investment advice. The content and materials featured on this page are for educational purposes only.
