The 10-year gilt yield has soared from roughly 3.75pc to 4.5pc since mid-September, the same territory as during the aftermath of Liz Truss’s October 2022 mini-budget.
Back then, the market was also spooked by concerns that liability-driven investments could unravel, as well as the Bank’s deeply unfortunately decision to announce, just days ahead of the Truss Budget statement, it was throwing tens of billions of pounds of additional gilts at the market as it unwinds its enormous quantitative easing programme.
Now, even without those aggravating factors, gilt yields are once again at levels previously seen as high enough to provoke a collective political meltdown – and a wholesale policy reversal.
We’re in a situation where, while the Bank of England has been lowering rates and talks about doing so more, albeit at a slower pace, government borrowing costs – the true benchmark for mortgages, business finances and other commercial loans – are going in the opposite direction.
I would suggest this is a deeply worrying trend – indicating that market expectations are becoming disconnected from policymakers’ statements and actions.
While the Bank wants to lower rates more, as it again tries to convince itself inflation is licked, financial markets – increasingly mindful this Government is far more statist and fiscally profligate than Labour administrations led by Tony Blair and even Gordon Brown – is pushing borrowing costs up.
When this happens, there is often much bluster from politicians and state-financed economists. But history shows the outcome is inevitable: the market always wins.
When Blair took office in 1997, UK government spending was 35pc of GDP, rising to around 40pc a decade later – the long-run pre-Covid historic average. The 2008/09 financial crisis saw a sharp increase to 45pc, not least due to bank bailouts, which then fell back to 40pc in 2019 after 10 years of Tory-led rule.
Lockdown changed all that, with state spending ballooning to an unprecedented 55pc of GDP and, since then, rather than returning to type, government spending is still at 45pc and, under Reeves, rapidly heading up even more.
The big problem is that, while spending is rising, it is largely financed by borrowing – which is why markets are getting worried and debt service costs are rising, whatever the Bank of England says.