Britain’s Prime Minister Keir Starmer chairs a roundtable with UK business leaders in Downing Street in London on April 3, 2025.
Ben Stansall | Via Reuters
While not alone in experiencing bond market volatility this week — with global yields rising among major economies as investors worry about the inflation trajectory, yawning budget deficits and growing debt piles — confidence in the U.K. has been dented by concerns over the country’s particulars.
Doubts have mounted over Finance Minister Rachel Reeves’ ability to balance the budget and bring down the national deficit, which hit 4.8% in 2024, as well as the country’s debt pile of around 96% of the GDP, at the last reading in July.
Reeves is set to unveil the next Autumn Budget on Nov.26, against a wider economic backdrop of sticky inflation and lackluster growth that pose a conundrum for the Bank of England.
Global bond yields stabilized on Thursday, with the yield on the U.K.’s 30-year gilt at 5.582%, as of 9 a.m. London time. Economists commented that it’s not time to panic, just yet, but noted that the U.K. faces some nuanced challenges.
“It’s been a record issuance of gilts this week, with a syndication that was up from £8 billion to £14 billion, so there’s been a lot of supply. It’s important not to look at Tuesday price action and panic, but it’s definitely on investors’ radar,” Fredrik Repton, senior portfolio manager in the Global Fixed Income Team at Neuberger Berman, told CNBC Thursday.
“People are worried about deficits. People are worried about the political situation we see now. The U.K. budget was expected in October, [but] it’s been pushed back to November. That also makes the Bank of England’s job quite difficult, because the budget is going to come after the meeting [on Nov.6], and this is the full forecast meeting,” he told CNBC’s “Squawk Box Europe.”
Fabio Balboni, senior European economist at HSBC, agreed that sticky inflation, which rose to a hotter-than-expected 3.8% in July, poses a dilemma for the Bank of England.
“There are significant concerns in the market, and I think it comes from the combination of two factors,” Balboni said.
“Fundamentally, one is that some inflation resilience obviously makes it harder for central banks to cut further, and it’s harder in some jurisdictions, like in the U.K., for instance. [BOE Governor] Andrew Bailey reminded us yesterday that there might not be more cuts forthcoming, at least in the near term, because, of course, inflation is close to 4%,” he told CNBC’s “Early Europe Edition” on Thursday.
“Then, on the other hand, you have fiscal concerns, still very large fiscal deficits, starting in the U.K., for instance, with very difficult decision looming ahead for the government at the Autumn Budget,” Balboni added.
Keep calm and carry on
The U.K. Treasury on Wednesday revealed that Reeves will deliver the government’s budget plans for 2026 on Nov. 26., facing heightened pressure to resolve a fiscal conundrum over spending, taxation and borrowing.
Reeves has already announced big-ticket spending plans on the National Health Service, defense and education, but she has pledged to borrow only for investment purposes, with day-to-day spending set to be funded by tax receipts.
These fiscal rules, which she has repeatedly said she will not break, leave tax rises — or unpopular welfare spending cuts — as the few options left to her if she is to target a balanced budget by 2029/2030, as previously promised.
Reeves has already conducted a tax raid on British businesses, meaning that workers, the wealthy and banks could be on the hook, as the government looks to raise revenues.
Some analysts caution against panic over U.K. borrowing costs and the forthcoming budget, saying the gilts market cannot be judged in isolation.
Bill Blain, a market strategist and founder of London-based Wind Shift Capital, cautioned in his “Morning Porridge” newsletter on Thursday that “you can’t analyse U.K. gilt risks without factoring the global picture.”
“What rising yields in the global bonds markets are warning about is a rising inflation threat. The fact that is accompanied by high debt loads (creating refinancing risk), geopolitical uncertainty, and rising political instability (ie the difficulty in predicting the policy flip-flops of populist politicians, and weighting their political competency), is what colours the current vulnerability of market sentiment,” he said.
