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Public finances Triple-locked Reeves in a bond market bind

The Guardian|January 09, 2025
Rachel Reeves has a bond market headache.
- Richard Partington
Public finances Triple-locked Reeves in a bond market bind

After a rise in the government's borrowing costs, with the 10-year cost of debt hitting the highest level since 2008, the chancellor is in danger of breaking her fiscal rules.

For the past 15 years, western governments were able to rely on financial markets for cheap borrowing. After the 2008 financial crisis, the world's most powerful central banks cut interest rates close to zero while inflation was low, with the aim of helping to reboot economic activity.

Since the pandemic, those trends are now firmly in reverse.

Why are bond yields rising?

Governmental borrowing costs have risen worldwide as investors weigh up the prospects of stubbornly high inflation forcing central banks to hold back from cutting interest rates as far and as fast as hoped.

Inflation rocketed after the exit from Covid lockdowns and the energy shock triggered by Russia's war in Ukraine, leading central banks to drive up interest rates.

Inflation has cooled, but remains more persistent than had been hoped - limiting the scope for further rate cuts.

Is Britain alone?

Part of the problem in the UK is domestic: the resilience of wage growth, service sector prices, and fears that Labour tax and spending measures could stoke inflation.

However, there is also a global dimension: investors fear Donald Trump's tariff proposals could also fuel inflation, forcing the US Fed to keep interest rates higher for longer. Trump's tax-cutting plans could also drive up US national debt, adding to the supply of US Treasury bonds.

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