Pound falls as UK long-term borrowing costs hit highest level since 1998

London: The pound fell sharply as long-term borrowing costs in the UK reached their highest level since 1998 on Tuesday, as concerns over the country’s public finances combine with a global move higher in bond yields.

Sterling slumped 1.3 per cent against the dollar to $1.336, putting it on track for its biggest one-day drop since April, and 0.7 per cent against the euro, a day after UK Prime Minister Sir Keir Starmer reshuffled his economic team.

Adding to pressure on chancellor Rachel Reeves ahead of her autumn budget, the yield on the 30-year gilt rose 0.08 percentage points to 5.72 per cent. Bond yields rise when prices fall.

UK borrowing costs are the highest in the G7, driven up in recent years by persistent inflation and rising public debt. The higher yields — if sustained — will further erode the chancellor’s headroom against her key fiscal rule.

“We’re seeing a slow-moving vicious circle: rising debt concerns push yields higher, worsening debt dynamics, which in turn push yields higher again,” said Jim Reid, head of macro research at Deutsche Bank.

Analysts at Capital Economics estimate higher borrowing costs have reduced Reeves’ headroom against the current budget rule — which requires the government to fund day-to-day spending via tax revenues by the end of the parliament — to just over £4 billion (€4.5 billion) from £9.9 billion at the time of her spring statement.

Ten-year gilt yields, the measure of long-term borrowing costs more closely followed by investors, rose 0.07 percentage points to 4.83 per cent. They remain below a 16-year high of 4.93 per cent reached in January.

Francesco Pesole, an ING analyst, added that the pound’s fall was a “clear signal of how jittery the sterling market is when it comes to long-dated bond moves”.

Downing Street insisted that Mr Starmer’s shake-up of his economic team did not undermine Reeves or weaken the government’s commitment to “iron clad fiscal rules”.

A spokesman for Mr Starmer said the beefing up of the Number 10 economic operation had been agreed with Reeves. “The prime minister and chancellor want the strongest possible team on the pitch,” he said.

Mr Starmer on Monday appointed former Bank of England deputy governor Minouche Shafik as his economic adviser and brought in Treasury minister Darren Jones as his Number 10 chief secretary and enforcer.

In a sign that elevated borrowing costs continue to draw in buyers for newly issued debt, the UK raised £14 billion from a syndication of 10-year gilts on Tuesday — a record for a single sale — that attracted orders of more than £140 billion. The Treasury is issuing near-record quantities of gilts this year.

The persistent upward pressure on bond yields this year has extended beyond the UK, with borrowing costs rising across big economies.

The gilt moves came as other major bond markets sold off on Tuesday. German 10-year Bund yields rose 0.05 percentage points, while in the US the benchmark 10-year Treasury was up 0.07 percentage points.

In the US, Treasury yields have moved higher on concerns over the country’s debt pile and President Donald Trump’s attacks on the central bank, while German long-term yields are at their highest since 2011 after the government announced a big increase in spending on defence and infrastructure.

Simon French, chief economist at Panmure Gordon, said the top reason why the UK was hit hardest by a global sell-off was that it now stuck out as having a bigger problem with inflation.

In 2022-23, UK inflation had risen higher than elsewhere, but with a similar profile. “This summer we’ve had this hump in inflation and it hasn’t been replicated elsewhere,” he said.