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The UK’s long-term borrowing costs reached their highest in nearly 30 years on Tuesday, so investors made sure the British pound felt as low as they did.
What does this mean?
Borrowing costs have been creeping up in the UK: they’re now higher than those in Canada, France, Germany, Italy, Japan, and the US. And this week, yields – which increase the cost of borrowing – on 30-year government bonds reached 5.7%, their highest since 1998.
That’s because investors are factoring in some extra risk. Government debt is rising and inflation’s sticking around, with analysts warning of a “vicious cycle” where higher yields make debt more expensive to repay, which pushes yields higher… And so on.
And, disappointed by Blighty’s financial outlook, investors pushed the British pound down around 1% versus the US dollar and 0.4% against the euro.
Bonds have shaken the British market before. In 2022, investors reacted to an unfunded budget plan by sending yields to the ceiling overnight. Traders are worried that without effective intervention, the same could happen again.
Now, this bout does seem to be more of a slow burn. Borrowing costs have been nudging higher for months, remember. Thing is, that only means the government’s been feeling the pressure for longer – and it can’t justify an emergency response, either.
The bigger picture: Misery loves company.
Plenty of countries understand Europe’s woes. Japan’s 30-year government bond yield reached a new record high of above 3.2% last week, after data showed that inflation pushed higher. And in France, the 30-year yield hit the highest level in over 16 years, with investors fretting over public debt levels. As long as governments fail to get their finances in order, investors will look toward alternatives like gold and bitcoin: they’re likely to hold their value better than fiat currencies.
