Government Bond Turmoil Leads to 15-Year High in Borrowing Costs
The UK is experiencing a 15-year high in government borrowing costs due to concerns that interest rates will remain high in an attempt to control inflation.
Amidst global bond market turmoil, the yield on ten-year gilts has exceeded 4.75%, a level not seen since the 2008 financial crisis. This suggests that interest rates will rise to 6% or higher for a significant portion of 2024. This is particularly troubling for businesses and households with mortgages.
The potential for “higher for longer” interest rates has also caused concern among investors in the United States. The yield on the equivalent ten-year bond in the US came close to a 16-year high.
Previously, it was hoped that interest rate hikes would be followed by cuts. However, there is now a fear that an extended period of high rates may be necessary to bring inflation back under control, potentially leading to a recession.
Michael Hewson, an analyst at CMC Market, stated that the focus has shifted from the number of rate hikes to how long rates will remain elevated.
Inflation fight: Investors are betting that the Bank of England will be forced to keep interest rates at 6% or higher for much of 2024
Official figures indicate that UK inflation dropped to 6.8% in July, down from 7.9% in June and a peak of 11.1% in October. However, it still surpasses the 2% target, and with wages increasing at a record pace, investors are predicting interest rates to reach 6% this year and possibly 6.25% next year.
According to financial markets, rates are expected to remain above 6% until the second half of next year, presenting a “higher for longer” scenario that could be detrimental for the economy.
Rates have already increased from 0.1% to 5.25% since December 2021.
In the US, it was previously believed that rates had reached or were near their peak and would eventually be cut to prevent a recession. However, the Federal Reserve’s recent update warned of “significant upside risks” to inflation, indicating caution.
Samy Chaar, chief economist at Lombard Odier, noted that the market is now pricing out rate cuts, or at least delaying them, rather than pricing in higher rates in the US.
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