Truss record falls to Reeves – what does it mean for mortgages?
The yield on the UK’s 30-year government bond climbed by 0.04 percentage points on Tuesday morning, reaching 5.21 per cent, according to Reuters data. This marks the highest level in 27 years, surpassing the peak seen after Liz Truss’s controversial mini-budget.
Borrowing costs on 10-year gilts also rose to a 14-month high, standing at 4.64 per cent. Rising yields typically reflect declining bond prices. The increased borrowing costs mean that Chancellor Rachel Reeves may be suddenly put between a rock and a hard place, as the increased rate rises all but wipe out the ‘headroom’ her new fiscal rules gave her for government borrowing.
Tom Bill, Knight Frank’s head of UK residential research, told Mortgage Introducer that this kind of pressure could negatively affect mortgage interest rates – and in turn, house prices: “We have seen a jump in borrowing costs since the Chancellor set out her economic plans and expect more downward pressure on prices and transaction volumes in the short term. Gilt yields are notably higher than recent Office for Budget Responsibility forecasts. As a result, mortgage lenders are reluctantly pushing rates higher, which will eventually feed through into house prices.”
This new high in borrowing costs comes as part of a global sell-off in government bonds, with traders reacting to concerns over persistently high inflation and the likelihood of central banks maintaining elevated interest rates. In Europe, fresh data showed eurozone consumer price inflation averaged 2.4 per cent in December, the highest in five months, cutting expectations for a jumbo interest rate cut by the ECB. Meanwhile, Japan’s 30-year bond yields reached 2.3 per cent, the highest in a decade, while long-term yields in the US and France hit their highest levels since October 2023.
Read more: HSBC to raise mortgage interest rates again
Richard Carter, head of fixed interest at Quilter Cheviot told The Times that the bond market slump “can be partly attributed to Donald Trump’s victory in the US election as his policies on tax and immigration are expected to drive inflation, leading to rising yields in the US and consequently, in the UK.” Other economists agree that the Trump effect could help drive inflationary pressures. “If Trump carries out his plans for tariffs and deportation, then I would expect a combination of higher inflation and lower output, the exact outcome depending on how the Federal Reserve responds to the inflation increase,” Mark Gertler, Henry and Lucy Moses Professor of Economics, New York University told Newsweek.
Investor appetite for UK long-term bonds weakened noticeably during a government bond auction on Tuesday. The sale of £2.25 billion in 30-year gilts saw a bid-to-cover ratio of 2.75 times, the lowest since December 2023, according to the Debt Management Office. The bonds were sold at a yield of 5.19 per cent, a significant increase from the 4.74 per cent yield recorded in the previous 30-year bond auction.
The rise in gilt yields has raised concerns for the UK government, as higher borrowing costs increase the Treasury’s debt-servicing obligations. This could constrain the chancellor’s fiscal flexibility, potentially leading to higher taxes or reduced public spending in the future. Borrowing costs on long-term debt have risen from 4.35 per cent before Labour’s budget last October.
The UK gilt market has faced considerable volatility in recent years. In the aftermath of the September 2022 mini-budget, gilt prices plunged, prompting the Bank of England to intervene by purchasing bonds to stabilize markets and prevent a financial crisis among pension funds reliant on liability-driven investment strategies (LDIs).
Currently, gilt prices are under pressure as financial markets anticipate only two interest rate cuts by the Bank of England this year, reflecting concerns about persistent inflation in the services sector and robust wage growth. However, some economists believe the central bank will need to adopt more aggressive monetary easing to address economic challenges and a weakening labour market, which could bolster bond prices.
BlackRock, the world’s largest asset manager, expressed optimism about UK government debt, stating it was “overweight” in gilts, anticipating a faster pace of interest rate reductions. Michael Grady, head of investment at Aviva, also recommended investing in gilts, citing expectations that “the Bank of England will cut rates more than the market expects in 2025 on a softer inflation outlook and weaker than expected growth.”
