Why the soaring cost of government borrowing matters for everyone

Published

2 years ago

October 23, 2023

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Except on rare occasions – last year’s post-Liz Truss mini-budget episode being one of them – the bond market rarely garners as much attention as other financial sectors.

Yet these markets, where companies and governments come to borrow, are the foundations for the global economy.

In particular, the value of government bonds – and hence their imputed interest rates – have an enormous bearing on all our lives. Higher bond yields, as these interest rates are called, imply that we will all be paying more interest on that debt for years to come.

So the fact that these interest rates are shooting up rapidly around the world in recent weeks is no trivial matter. On Monday morning, the yield on US 10-year debt (typically seen as a benchmark for this market) broke through the 5% mark.

The UK’s own 10-year government debt is, at 4.7%, now above the highs it hit following last autumn’s mini-budget.

The 30-year UK government bond yield just hit the highest level since 1998. This is big stuff – and indeed the degree of yo-yoing in recent weeks has been unprecedented.

Something is clearly going on in these markets, but what?

This is where things get a little murkier, because it turns out there is no single, definitive explanation for these fluctuations. That comes back to a broader point, which is that the price of a given country’s debt is telling you lots of things at the same time.

It could be telling you about future expectations for where central bank interest rates are heading in future. At one and the same time, it could be signalling how much demand there is in capital markets for a given country’s debt. It could equally be caused by supply: if a government is issuing lots of debt, you might reasonably expect people to ask for higher interest rates to lend them that money.

And the explanation for the recent rise in bond yields could well be all of the above.

A lot of debt

It’s worth saying, before we go into it, that most of this shift seems to be centred on the US economy – but any rise in Treasury yields (those US government bonds are typically referred to as “Treasuries”) has a direct impact on the rest of the world. So it matters for everyone.

Anyway, let’s take the central bank thesis first. Up until quite recently, most economists and investors had been assuming that having risen sharply in recent years, official central bank interest rates would be cut quite rapidly next year – that the shape of the future interest rate curve might resemble the Matterhorn, that Swiss mountain which used to be on the side of Toblerone packages until they stopped making the chocolate in Switzerland.

But central banks, including the US Federal Reserve and Bank of England, have been at pains recently to signal that those rates might not be coming down quite so quickly.

In fact, says Bank of England chief economist Huw Pill, the future path for interest rates might look a bit more like Table Mountain – a long, flat plateau of higher rates.

So that’s one part of the explanation. Another is that right now the US government is borrowing enormous amounts of money, partly to finance its Inflation Reduction Act and CHIPS Act, as well as new Biden administration welfare policies.

The combined effect is, according to the Congressional Budget Office, to lift the US national debt up to the highest levels since the aftermath of WWII.

That’s a lot of debt – and while everyone’s known about these plans for some time, it’s possible investors are only now beginning to baulk at the prospect of absorbing all that debt.

Dangerous territory

The final explanation, which is considerably more speculative but also more unsettling, comes back to something else.

You may recall that after Russia invaded Ukraine, Western nations talked about doing what they could to ensure Russia would pay for reconstruction in Ukraine, including potentially seizing Russian assets held in Western nations.

No one is entirely sure how this would work, but at the recent IMF annual meetings in Marrakech, the group of seven leading economies (the US, Japan, Germany, the UK, France, Canada and Italy) agreed to begin working on it.

As I say, no one is entirely sure how this should be done. It might be possible to confiscate some of the interest payments which might otherwise have been due to Russia, earned by Russian assets held in Europe.

But the G7 is also aware that this is dangerous territory, begging questions about the function of international law and the international monetary system.

It also sends a pretty clear message to other countries. If the G7 is content to start seizing Russian assets in their countries then what is to stop them doing likewise with, say, Chinese assets?

Perhaps you see where this is going. At the moment, China is one of the biggest buyers of US government debt, and there is evidence that it is slowing its purchases of US government debt.

Might that be because it’s somewhat spooked by the ongoing efforts to recoup money from Russia? Might Chinese authorities worry that something similar could or would happen to its holdings of US Treasuries if it invaded Taiwan? No one knows for sure, but this is another not altogether implausible explanation for those higher bond yields.

All of which is to say: it’s complicated. But it’s also quite scary. And higher interest rates mean higher debt repayment costs for this country in the coming years.

The ability of this government (or a possible future Labour government) to borrow to finance big projects in future depends on being able to borrow at a reasonable interest rate. And those interest rates are getting considerably higher.

Business

How markets reacted to uncertainty over Rachel Reeves’s future

Published

3 hours ago

July 3, 2025

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How markets reacted to uncertainty over Rachel Reeves's future

The pound fell and state borrowing costs rose during a period of uncertainty over the chancellor’s future on Wednesday.

During Prime Minister’s Questions, Sir Keir Starmer declined to guarantee whether a visibly emotional Rachel Reeves would remain chancellor until the next election following the government’s welfare bill U-turn.

Money blog: Cash in your pocket set to change

Following his remarks, the value of the pound dropped and government borrowing costs rose, via the interest rate on both 10 and 30-year bonds.

Although market fluctuations are common, there was a reaction following Sir Keir’s comments in the Commons – signalling concern among investors of potential changes within the Treasury.

Sterling dropped to a week-long low, hitting $1.35 for the first time since 24 June. The level, however, is still significantly higher than the vast majority of the past year, having come off the near four-year peak reached yesterday.

While a drop against the euro, took the pound to €1.15, a rate not seen since mid-April in the aftermath of President Donald Trump’s tariff announcements.

Meanwhile, the interest rate investors charge to lend money to the government, called the gilt yield, rose on both long-term (30-year) and ten-year bonds.

The UK’s benchmark 10-year gilt yield – so-called for the gilt edges that historically lined the paper they were printed on – rose to 4.67%, a high last recorded on 9 June.

And 30-year gilt yields hit 5.45%, a level not seen since 29 May.

Both eased back in the hours following – as a spokesperson for the prime minister attempted to quell speculation about the chancellor’s future.

Sky News understands the prime minister made clear to the chancellor that she has his “complete support” and remains integral to his project.

Ms Reeves has committed to self-imposed rules to reduce debt and balance the budget. Speculation around her future led investors to question the government’s commitment to balancing the books – and how they would do that.

The questions over her future came after the government scrapped the core money-saving component of its welfare bill, which had been intended to reduce spending in order to meet fiscal rules.

Business

More bad news for Elon Musk as Tesla deliveries miss target again

Published

3 hours ago

July 3, 2025

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More bad news for Elon Musk as Tesla deliveries miss target again

Tesla’s woes have deepened as latest production and deliveries figures showed a greater fall than expected.

A total of 384,122 Teslas were delivered from April to June this year, a 13.5% drop on the same period last year and the second quarter of slumping output.

Wall Street analysts had expected Tesla to report about 1,000 more deliveries.

It’s bad news for Tesla chief executive Elon Musk in a week of attacks from President Donald Trump on him personally, as well as his companies.

Money blog: Customers to get up to £2,000 compensation from water companies

Mr Musk found himself on the wrong side of Mr Trump and the majority of US congresspeople in his opposition to the so-called big beautiful bill approved by the US Senate.

His criticism of the inevitable debt rises the bill will result in led Mr Trump threatening to end subsidies for Mr Musk’s numerous businesses and to deport him.

His role as founder and chief executive of numerous businesses has made him the world’s richest man, according to Forbes.

As well as Tesla, Mr Musk founded space technology company SpaceX and Starlink. He also acquired the social media company Twitter, which he rebranded X.

It was the poor performance of Tesla that pushed him out of full-time politics and back to the Tesla offices.

After months of share price tumbles and protests at Tesla showrooms, sales drops and car defacings, Musk left his work with the Trump administration’s Department of Government Efficiency (DOGE).

Not everyone viewed the figures as negative.

Analysts at financial services firm Wedbush said: “Tesla’s future is in many ways the brightest it’s ever been in our view given autonomous, FSD [full self-driving], robotics, and many other technology innovations now on the horizon with 90% of the valuation being driven by autonomous and robotics over the coming years but Musk needs to focus on driving Tesla and not putting his political views first.”

After a 5% share price fall earlier this week when Mr Musk strayed back into political matters, Tesla stock rose 4.5% on Wednesday.

The latest financial details for Tesla will be published later this month.

In the first three months of the year, Tesla’s profits fell by 71% to $409m (£306.77m) from $1.39bn (£1.04bn). Revenues were also well below forecasts, dropping 9% to $19.3bn (£14.5bn).

Business

AstraZeneca exit is a frightening prospect for the City and the government

Published

18 hours ago

July 2, 2025

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AstraZeneca exit is a frightening prospect for the City and the government

It’s a threat that will send a shiver down the spine of Downing Street and shake the City of London to its core.

Even the notion that AstraZeneca (AZ) – the UK’s most valuable listed company – is thinking of upping sticks and switching its stock market listing to America is a frightening prospect on many levels.

After all, if your biggest firm departs for Wall Street, what message does it send to an already bruised London stock market that has struggled to find its way since the UK’s vote to leave the European Union?

Money latest: Cash in your pocket set to change

The timing of the report in The Times that Pascal Soriot, the pharmaceutical company’s long-standing chief executive, is considering his own Brexit for the company, will not be lost on anyone.

The Treasury is under severe strain and the Starmer government, apparently focused on compromise given its welfare reform U-turns, bruised.

Ministers have been scrambling to get the support of business back, after a budget tax raid that has added to the cost of employing people in the UK, by launching a series of strategies to demonstrate a growth-led focus.

Mr Soriot’s reported shift is the culmination of years of frustration over UK tax rates and support for business – though it could also remove a focus on his own remuneration as the highest-paid director of a UK-listed firm.

AZ has its own gripes with Labour.

In January, the company cancelled a planned £450m investment in a vaccine factory on Merseyside, accusing the government of reneging on the previous Conservative administration’s offer of financial aid.

At the same time, it has been rebuilding its presence in the United States.

That speaks to not only a home market snub but also the election of a US president intent on protecting, as he sees it, America-based companies and jobs.

Donald Trump is threatening 25% tariffs on all pharma imports.

AZ has already promised a $3.5bn (£2.6bn) investment in US manufacturing by the end of 2026.

It has also rejoined the leading US drug lobby group, bolstering its voice in Washington DC.

There are sound reasons for bolstering its US footprint; more than 40% of AZ’s revenues are made in the world’s largest economy. Greater US production would also shield it from any duties imposed by Mr Trump and any MAGA successor.

Since Brexit, complaints among UK stock market constituents have been of low valuations compared to peers (with a weak pound also leaving them vulnerable to takeovers), weaker access to capital and poor appetite for new listings.

Wise, the money transfer firm, became the latest UK name to say that it intends to move its primary listing to the US just last month.

If followed through, it would tread in the footsteps of Flutter Entertainment and the building equipment suppler CRH – just two big names to have already left.

London was snubbed for a listing by its former chip-designing resident ARM back in 2023.

An initial public offering by Shein, the controversial fast fashion firm, had offered the prospect of the biggest flotation for the UK in many years but that was blocked by the Chinese authorities.

Efforts to bolster the City’s appeal, such as through the Financial Conduct Authority’s overhaul of listing rules and the creation of pension megafunds to aid access to capital, have also been boosted in recent months by investors in US companies taking a second look at comparatively low valuations in Europe.

Market analysts have charted a cash spread away from the US as a hedge against an erratic White House.

The Times report suggested that Mr Soriot’s plans were likely to face some opposition from members of the board, in addition to the UK government.

AstraZeneca has not commented on the story. Crucially, it did not deny it.

But a government spokesperson said: “Through our forthcoming Life Sciences Sector Plan, we are launching a 10-year mission to harness the life sciences sector to drive long-term economic growth and build a stronger, prevention-focused NHS.

“We have already started delivering on key actions, from investing up to £600m in the Health Data Research Service alongside Wellcome, through to committing over £650m in Genomics England and up to £354m in Our Future Health.

“This is clear evidence of our commitment and confidence in life sciences as a driver of both economic growth and better health outcomes.”

Governments don’t comment on stories such as these, but you can bet your bottom dollar that the departure of your biggest firm by market value is not the message a government laser-focused on growth can afford to allow.