In the United Kingdom, rising investor anxiety over high borrowing costs a stagnating economy, and uncertainty over the arrival of president-elect Donald Trump in the White House has taken its toll on both the pound sterling and sent the bond market into panic.
While the pound dropped to its lowest level in 14 months ($1.226) and 30-year bond yields hit 5.46% their highest levels in 27 years.
Underscoring sterling's weakest performance since November 2023 is growing concern over runaway government levels amid a poorly performing economy.
In an attempt to cool market fears, the UK Treasury tried to reassure the public about the state of the public finances. Citi analysts attribute the bond market panic to investor worry about government borrowing plans.
The broker suspects sustained inflation pressure could prevent the Bank of England (BoE) from cutting interest rates quickly to help the economy.
Despite what could be a continued bond sell off, Treasury also reassured investors the country wasn’t heading for a repeat of the 2022 "mini-budget" crisis. This forced the Bank of England into emergency bond purchases.
Treasury minister Darren Jones, Reeves' deputy, told parliament the UK bond markets continue to function orderly with no need for emergency intervention. However, Pepperstone senior research analyst Michael Brown isn’t so convinced and sees more challenges ahead.
“This dynamic, of yields moving higher, as the respective currency falls, is a classic sign of fiscal de-anchoring taking place, and of participants losing confidence in the government in question’s ability to exert control over the fiscal backdrop,” Brown said in a client note.
Meanwhile, PIMCO, one of the world's largest bond investors attributed recent events to shifts in the U.S. debt market ahead of Trump's presidency.
"Although UK-specific factors, such as the budget, have contributed to the rise, most of the increase has been driven by rises in U.S. Treasury yields during the same period," PIMCO economist Peder Beck-Friis said.
Meantime, Britain is due to issue around 300 billion pounds of government bonds over the coming financial year – the second highest level on record – with bond sales expected to continue rising in 202-2026.
