UK gilt yields have continued to rise, with the economy now risking a “slow Truss” disaster, according to a CEO of one of the world’s largest IFA organisations.
This stark warning comes with the 10-year gilt yield sitting at around 5.25 per cent, its highest since 2008. The 30-year hit 5.89 per cent earlier this month, a level unseen since 1998.
Both are above the peaks that forced emergency central bank action four years ago in the wake of the mini-Budget delivered in Liz Truss’s short period as PM.
These high gilt yields mean the new chancellor, John Healey, will have a far weaker hand than official forecasts suggests when he delivers his first Budget on 28 October, according to deVere Group CEO Nigel Green.
Green adds: “The bond market is doing to the UK’s finances, in slow motion, what it did during the 2022 mini-budget meltdown. Everyone remembers the Truss moment because it happened in a week. This one’s happening in slow motion, and the damage could end up bigger.
“Borrowing costs are already higher than when the bond market went mad in 2022. There’s just no single day, no single decision, to point at.”
He says this squeeze is landing squarely on the Chancellor’s room for manoeuvre. Rising yields have cut estimated fiscal headroom from around £26bn to £13.8bn, with no new spending announced and no tax cut delivered.
Green says that every uptick in gilt yields adds to debt interest costs, shrinking the buffer Healey has to play with. “The Chancellor’s already lost almost half his headroom and he hasn’t stood up at the despatch box yet for the Budget. The market’s writing the first draft of this Budget. Every basis point makes the arithmetic harder, and every tax rise or spending restraint gets judged against a bond market that’s already moved.”
Green points out that the Truss mini-budget could be undone with a U-turn and a change of Chancellor. But he adds that the current “gradual repricing” offers no such exit. The central bank has said it will stop selling very long-dated gilts under quantitative tightening, a sign that the far end of the curve is seen as a pressure point.
He also adds that the traditional buyers of long gilts, DB pensions schemes, are shrinking in number, while the Government’s borrowing needs remain large.
“You can’t reverse a trend. The old reliable buyers of long-dated debt are fading, the supply keeps coming, and global bond markets are already jittery. It’s a combustible mix.”
DeVere adds that global forces are also pushing yields upwards, thanks to inflation worries, higher oil prices and tighter policy in Japan and the US. Yet the UK, with bank rate at 3.75 per cent, a thinning fiscal buffer and a budget looming, is exposed when sentiment turns.
He adds that with the bank rate is above where it stood in 2022, yet long-dated borrowing costs are still climbing, which he says shows how much risk the market is now pricing into UK debt.
“The pain won’t stay in Whitehall. Higher gilt yields feed into mortgage pricing, corporate borrowing costs and pension valuations, spreading the strain across households and businesses.
“Global bond markets are setting the tone, but the UK’s got its own vulnerabilities and 28 October is where they get tested.
“If the Budget doesn’t convince bond investors the numbers add up, the drip becomes a flood. Doubt is all it takes for gilts to misbehave, and bond vigilantes to come roaring back.”
The Truss episode showed how quickly confidence unravels when investors question the fiscal maths. Healey’s challenge is to persuade markets before they finish persuading themselves.
