Plenty of concern about UK gilt yields and economic health but this isn’t a Liz Truss moment
How worried should Rachel Reeves be about the fact that the interest rates on government bonds have leapt to the highest level in more than a quarter of a century?
More to the point, how worried should the rest of us be about it?
After all, the interest rate on 30-year government bonds (gilts, as they are known) hit 5.37% today—the highest level since 1998. The interest rate on the benchmark 10-year government bond is also up to the highest level since 2008.
Higher government borrowing rates mean, rather obviously, that the cost of all that investment Keir Starmer has promised in the coming years will go up. And since these rates reflect longer-term expectations for borrowing costs, in practice it means everything else in this economy will gradually get more expensive.
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There are short-term and long-term consequences to all of this. In the short run, it means it will be harder for Ms Reeves to meet those fiscal rules she set herself. Back at the budget, she left herself a (in fiscal terms) paper-thin margin of £9.9bn not to overshoot on borrowing vs her new rules.
According to Capital Economics, based on recent market moves, that margin might now have been eroded down to around £1bn.
And, given that’s before the Office for Budget Responsibility (OBR) has even decided on changes to its forecasts, it’s now touch and go as to whether Ms Reeves will meet her fiscal rules. As my colleague Sam Coates reported this week, the upshot is the Treasury is poised to pare back its spending plans in the coming years – a depressing prospect given the chancellor only just set them. But that won’t be clear until the OBR’s updated forecasts are published in March.
However, fiscal rules and political embarrassments are one thing – the bigger picture is another. And that bigger picture is that the UK is being charged higher interest rates by international investors to compensate them for their concerns about our economic future – about rising debt levels, about the threat of higher inflation and about fears of sub-par growth in the years to come.
How does this compare to the Liz Truss mini-budget?
But perhaps the biggest question of all is whether, what with long-term bond yields higher now (over 5.2%) than the highs they hit in October 2022, after the infamous mini-budget (4.8%), does that mean the economy is in even more of a crisis than it was under Liz Truss?
The short answer is no. This is nothing like the post mini-budget aftermath. Investors are concerned about UK debt levels – yes. They are repricing our debt accordingly. There was even a moment for a few days after the budget last autumn when the yields on UK bonds were behaving in an erratic, worrying way, rising more than most of our counterparts.
But – and this is the critical bit – we saw nothing like the levels of panic and concern in markets that we saw after the mini-budget. But don’t just take it from me. Consider two data-based metrics that are pretty useful in this case.
The first is to consider the fact that back in October 2022 it wasn’t just that the interest rates on government bonds were rising. It was that the pound was plummeting at the same time. That’s a toxic cocktail – a signal that investors are simply pulling their money out of the country. This time around, the pound is pretty steady, and is far stronger than it was in late 2022, when it hit the lowest level (against a basket of currencies) in modern history.
Is this just a UK problem?
The second test is to ask a question: is the UK an outlier? Are investors looking at this country and treating it differently to other countries?
And here, the answer is again somewhat reassuring for Ms Reeves. While it’s certainly true that UK government bond yields are up sharply in recent weeks, precisely the same thing is true of US government bond yields. Even German yields are up in recent weeks – albeit not as high as the US or UK.
In other words, the movements in bond yields don’t appear to be UK-specific. They’re part of a bigger movement across assets worldwide as investors face up to the new future – with governments (including the UK and the US under Donald Trump) willing to borrow more and spend more in the future. As I say, that’s somewhat reassuring for Ms Reeves, but I’m not sure it’s entirely reassuring for the rest of us.
One way of looking at this is by measuring how much the UK’s bond yields deviated from those American and German cousin rates in recent months. And while there was a point, a few days after Ms Reeves’ Halloween budget, when UK bond yields were more of an outlier than they historically have been after fiscal events, in the following weeks the UK stopped being much of an outlier. Yes, it was being charged more by investors, but then given the budget involved large spending and borrowing increases, that’s hardly surprising.
Now compare that with what happened after the mini-budget, when the UK’s bond yields deviated from their counterparts in the US and Germany more than after any other fiscal event in modern history – a terrifying rise which only ended after Kwasi Kwarteng stood down. Only when Ms Truss resigned were they back in what you might consider “normal” territory.
Now, it’s hard to compare different historical moments. The mini-budget was happening at a tense moment in financial markets, with the Bank of England poised to reverse its quantitative easing. Not all of the roller coaster can be attributed to Ms Truss. Even so, comparing that period to today is night and day.
Investors are not exactly delighted with the UK’s economic prospects right now. They’re letting this be known via financial markets. But they’re certainly not horrified in the way they were after the mini-budget of 2022.
Foreign state investors would be allowed to hold stakes of up to 15% in British national newspapers, ministers are set to announce amid a two-year battle to resolve an impasse over The Daily Telegraph’s ownership.
Sky News has learnt that the Department for Culture, Media and Sport could announce as soon as Thursday that the new limit is to be imposed following a consultation lasting several months.
The decision to set the ownership threshold at 15% follows an intensive lobbying campaign by newspaper industry executives concerned that a permanent outright ban could cut off a vital source of funding to an already-embattled industry.
It would mean that RedBird IMI, the Abu Dhabi state-backed fund which owns an option to take full ownership of the Telegraph titles, would be able to play a role in the newspapers’ future.
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RedBird Capital, the US-based fund, has already said it is exploring the possibility of taking full control of the Telegraph, while IMI would have – if the status quo had been maintained – forced to relinquish any involvement in the right-leaning broadsheets.
One industry source said they had been told to expect a statement from Lisa Nandy, the culture secretary, or another DCMS minister, this week, with the amendment potentially being made in the form of a statutory instrument.
Other than RedBird, a number of suitors for the Telegraph have expressed interest but struggled to raise the funding for a deal.
The most notable of these has been Dovid Efune, owner of The New York Sun, who has been trying for months to raise the £550m sought by RedBird IMI to recoup its outlay.
Another potential offer from Todd Boehly, the Chelsea Football Club co-owner, and media tycoon David Montgomery, has yet to materialise.
RedBird IMI paid £600m in 2023 to acquire a call option that was intended to convert into ownership of the Telegraph newspapers and The Spectator magazine.
That objective was thwarted by a change in media ownership laws – which banned any form of foreign state ownership – amid an outcry from parliamentarians.
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The Spectator was then sold last year for £100m to Sir Paul Marshall, the hedge fund billionaire, who has installed Lord Gove, the former cabinet minister, as its editor.
The UAE-based IMI, which is controlled by the UAE’s deputy prime minister and ultimate owner of Manchester City Football Club, Sheikh Mansour bin Zayed Al Nahyan, extended a further £600m to the Barclays to pay off a loan owed to Lloyds Banking Group, with the balance secured against other family-controlled assets.
Other bidders for the Telegraph had included Lord Saatchi, the former advertising mogul, who offered £350m, while Lord Rothermere, the Daily Mail proprietor, pulled out of the bidding last summer amid concerns that he would be blocked on competition grounds.
The Telegraph’s ownership had been left in limbo by a decision taken by Lloyds Banking Group, the principal lender to the Barclay family, to force some of the newspapers’ related corporate entities into a form of insolvency proceedings.
The newspaper auction is being run by Raine Group and Robey Warshaw.
The DCMS declined to comment.
Burberry, the UK’s only global luxury brand, is to cut around 1,700 jobs worldwide over the next two years after reporting a steep financial loss.
The company lost £66m in pre-tax profit in the year ended in March as luxury goods sales fell across the world and the company weathered an “uncertain” environment and a “difficult macroeconomic backdrop”.
A year earlier, it recorded £383m in profit.
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It’s suffered in recent years with the share price falling to such an extent the business was removed from the FTSE 100, the index of most valuable companies listed on the London Stock Exchange.
Despite the financial performance, the company was upbeat, with chief executive Joshua Schulman saying “I am more optimistic than ever that Burberry’s best days are ahead and that we will deliver sustainable profitable growth over time”.
What cuts are being made?
The retailer did not specify any shop closures – in the past year, it closed 26 and also opened 26 stores – but did highlight shift cuts and consolidations.
“We don’t have a store closing programme, per see,” Mr Schulman told investors
The night shift at Burberry’s Castleford factory will be cut, it proposed, saying the shift has resulted in overproduction.
“Significant” investment in the facility will be made, however, as the ambition is to scale up British production “over time”, Mr Schulman said.
Changes to the retail network across the world will be made with shop staff being scheduled around “peak traffic”.
Burberry will be “realigning” shop staff, he said, “so that we can offer the best service” at the busiest times.
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There will also be a “simplification” of Burberry’s regional structure and a “rebalancing” of central and regional responsibilities to reduce duplication and “accelerate decision making” through the retail network.
But the majority of changes will be made to “office space teams” around the world, the CEO said.
Commercial and creative teams have already been consolidated, Burberry’s annual results said.
What’s gone wrong?
Aside from the global slowdown in luxury goods sales over recession fears, additional headwinds have come in the form of President Trump’s tariffs.
“Clearly, the external environment has become more challenging since mid-February”, Mr Schulman told investors.
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Trump’s tariffs: What you need to know
Tariff risks were higher than first planned, the annual results said.
It led the US market to be described by Mr Schulman as “choppy” since February when Mr Trump began announcing tariffs on Mexico, Canada and China, as well as on goods such as steel and cars.
Sales also fell in the Asia Pacific region by 16%, the results showed.
Criticism was levelled at the 2021 British government decision to withdraw VAT refunds for overseas visitors, “which has made the UK the least competitive destination in Europe for tourist shopping”, the results read.
“Business in our UK home market continues to be seriously impacted” by the move.
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