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.
Money blog: Billionaire Premier League owner ‘thinking of leaving UK’ after budget
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.
Business
Race to keep British Steel furnaces running with last-minute efforts to secure raw materials
Last-minute efforts to keep British Steel operating are to be carried out today, as the plant races to secure a supply of raw materials.
The Department for Business and Trade said officials are working to secure supplies of materials, including coking coal, to keep British Steel operational, as well as to ensure all staff at the Scunthorpe site will be paid.
It added that setting up new supply chains was “crucial” as a fall in blast furnace temperature could risk “irreparable damage to the site, with the steel setting and scarring the machinery”.
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British Steel: What happens next?
Exchequer Secretary to the Treasury James Murray told Sky News the raw materials are “in the UK” and “nearby” the Lincolnshire site.
“There are limits to what I can say because there are commercial operations going on here, but what we need to do and what we are doing is making sure we get those raw materials into the blast furnaces to keep them going,” he said.
Companies including Tata – which ran the now-closed Port Talbot steelworks – and Rainham Steel have offered managerial support and materials to keep the Lincolnshire site running.
Business Secretary Jonathan Reynolds said in a statement that “when I said steelmaking has a future in the UK, I meant it”.
“Steel is vital for our national security and our ambitious plans for the housing, infrastructure and manufacturing sectors in the UK,” he added.
“We will set out a long-term plan to co-invest with the private sector to ensure steel in the UK has a bright and sustainable future.”
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Treasury minister James Murray said raw materials to keep the blast furnaces going are ‘in the UK’
Earlier this month, unions said the steelwork’s owner, Chinese company Jingye, decided to cancel future orders for the iron ore, coal and other raw materials needed to keep the furnaces running.
It meant the Scunthorpe plant had been on course to close down by May, bit it sparked urgent calls for government intervention.
Unions said Jingye decided to cancel orders of key materials for the steelworks
Emergency legislation was passed on Saturday bringing the steelworks into effective government control, and officials were on site as soon as the new legislation came into force.
However, the business secretary has warned that does not mean the plant is guaranteed to survive.
Appearing on Sky News’ Sunday Morning With Trevor Phillips, Mr Reynolds also said he would not bring a Chinese company into the “sensitive” steel sector again.
“I don’t know… the Boris Johnson government when they did this, what exactly the situation was,” he added. “But I think it’s a sensitive area.”
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‘I wouldn’t bring a Chinese company into our steel sector’
Jingye stepped in with a deal to buy British Steel’s Scunthorpe plant out of insolvency in 2020, when Mr Johnson was prime minister.
The minister added that while The Steel Industry (Special Measures) Bill stops short of the full nationalisation of British Steel, “to be frank, as I said to parliament yesterday, it is perhaps at this stage the likely option”.
The Conservatives accused the government of acting “too late” and implementing a “botched nationalisation” after ignoring warnings about the risk to the steelworks.
Read more:
A sticking plaster, not a solution: What next for British Steel?
How Trump, China and Reform all played their part
Shadow business secretary Andrew Griffith said: “The Labour Government have landed themselves in a steel crisis entirely of their own making.
“They’ve made poor decisions and let the unions dictate their actions.”
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