View of the Royal Exchange and the City of London where the glass architecture of Tower 22 Bishopsgate disappears into the fog on November 6, 2024 in London, United Kingdom.
Mike Kemp | In pictures | Getty Images
Borrowing costs in the UK rose on Tuesday after an auction of 30-year government bonds caused long-term bond yields to reach their highest level in almost three decades.
At 2:02 p.m. London time, the yield on the 30-year Treasury bond – a British government bond – rose 3 basis points to 5.212% – its highest level since the late 1990s.
The move came after Britain’s Debt Management Office auctioned 2.25 billion pounds ($2.83 billion) of 30-year government bonds with a coupon of 4.375% and a minimum yield of 5.194%, which corresponds to a discount compared to the face value of the bond.
The yield on 20-year government bonds increased by 3 basis points and was quoted at 5.153%.
Yields on shorter-term government bonds also rose on Tuesday.
UK 10-year Treasury yields rose 3 basis points to trade at 4.641%, while 2- and 5-year Treasury yields were slightly higher in early afternoon trading.
Concerns about “stagflation.”
Susannah Streeter, head of money and markets at Hargreaves Lansdown, said on Tuesday that the UK bond market was hit by uncertainty both at home and abroad.
Traders are worried, she told CNBC in emailed comments, that U.S. President-elect Donald Trump’s tariff plan could prove inflationary in America and beyond by putting upward pressure on the dollar or U.S. interest rates and consumer prices would be driven up.
The UK is facing its own spate of problems as the British economy unexpectedly contracted by 0.1% in October. Inflation is also above the Bank of England’s target of 2%, after rising slightly to 2.6% in November.
On the political front, concerns remain over the Labor government’s fiscal policies and its plans to increase taxes by 40 billion pounds ($50.1 billion) through a series of new and controversial measures. These include an increase in employers’ national insurance contributions – an income tax – that have led to warnings from companies that they will be less likely to hire new workers.
On Monday, the British Chambers of Commerce said business confidence had fallen to its lowest level since the UK’s “mini-budget” crisis in 2022, with many companies raising concerns about covering additional tax costs on top of rising wages.
“Concerns about stagflation are particularly simmering in the UK, with inflation creeping up and wage growth still high while the economy stagnates,” Streeter told CNBC on Tuesday. “In light of this uncertainty, the willingness to buy long-term UK government bonds appears to have declined.”
“Government yields have risen sharply in recent weeks, which is bad news for the government as it fuels fears about the state of public finances,” Richard Carter, head of fixed income at Quilter Cheviot, said in a note to clients on Tuesday.
“The Bank of England remains cautious about overly aggressive interest rate cuts and subdued investor demand in recent government bond sales underlines the uncertainty in the market.”
He added that UK government bond yields still represented an “attractive opportunity for long-term investors” as they were well above expected inflation levels.
“For investors with a lower risk appetite, short-term government bonds still represent a promising option and are less sensitive to market fluctuations,” he said.
Correction: This article has been updated to accurately reflect that the Treasury bonds auctioned had a coupon rate of 4.375%.