Strong labor data drives UK short-term borrowing costs beyond ‘mini-budget’ crisis levels

LONDON — The yield on short-dated U.K. government bonds, a key indicator of borrowing costs, has risen to levels not seen since the “mini-budget” turmoil that destabilized the market. This surge came after labor market data revealed an increase in wage growth on Tuesday.

According to Refinitiv data, the yield on two-year gilts, U.K. government bonds, rose by 23 basis points to 4.876% at 4:40 p.m. London time, surpassing the previous high of 4.75% set on Sept. 28, 2020, and reaching its highest level since July 2008.

In the February-April quarter, annual average wage growth in the U.K., excluding bonuses, accelerated from 6.7% to a record-breaking 7.2%. Economists had predicted a 6.9% wage growth for this period, which coincided with the increase in the national hourly minimum wage to £10.42 ($13.1) from £9.50.

When adjusted for inflation, real pay growth, including bonuses, was down by 2%, while excluding bonuses, it was down by 1.3%.

The latest report from the British Office for National Statistics also revealed a 0.2 percentage point increase in the employment rate, with a record high number of people in work. However, unemployment rose by 0.1 percentage points due to a decline in the number of economically inactive individuals not seeking work.

Economists were quick to predict a significant rise in gilt yields following the release of the labor market data, fueling expectations of rate hikes by the Bank of England.

Samuel Tombs, chief U.K. economist at Pantheon Macroeconomics, stated that these numbers reinforced the belief that the U.K. is facing a unique problem of persistent high inflation.

The Bank of England is currently striving to control price increases that surpass those of other developed economies, with April recording a rate of 8.7%.

Bruna Skarica, U.K. economist at Morgan Stanley, remarked, “Although we anticipate a softer inflation figure next week and in line with the Bank of England’s expectations from May, the higher-than-expected April figure and the recent Labor Force Survey results suggest that further rate hikes will be necessary.”

Meanwhile, there is an 81% probability that the U.S. Federal Reserve will decide to pause rate increases at this week’s meeting, according to the CME FedWatch Tool.

The “mini-budget” crisis in gilts, which caused turmoil in the mortgage market and threatened pension funds, arose following the announcement of a package of unfunded tax cuts by former Prime Minister Liz Truss and former Finance Minister Kwasi Kwarteng in September last year.

— CNBC’s Ganesh Rao contributed to this report