ar
UK financial markets are under pressure as concerns over public finances rise. During yesterday’s European session, the pound sterling faced its worst day since June, falling over 1%, while 30-year gilt yields rose to their highest level since 1998.
Fiscal Challenges for the UK Government
The UK’s fiscal problem continues to bring uncertainty to the economy, with government debt rising to £17.7 billion in May 2025 and a budget deficit estimated to reach at £20-25 billion. Chancellor Rachel Reeves faces pressure either to hike taxes or cut government spending in the upcoming Autumn Budget to meet their fiscal targets, which is a political challenge after recent changes on welfare reforms. ⁽¹⁾
Prime Minister Keir Starmer’s recent changes aim to support the economy. However, rising borrowing costs could hurt Starmer’s plans, as long-term gilt yields continue to increase the cost of servicing government debt. Rising debt concerns continue to push yields higher, which makes it more costly for the government to borrow. ⁽²⁾
Inflation and Bank of England Policy
Inflation also remains a headache for the Bank of England, which sits at 3.8% in July, continuing to bring in more problems for the UK economy. The BOE has cut interest rates to 4% in their previous meeting in August, reaching its lowest level in two years, aiming to support economic growth.
However, the opinions among the Monetary Policy Committee remain divided on whether to continue to cut rates, stating uncertainty driven by rising food, transport, and energy costs. Goldman Sachs expects interest rates to be at 3% by early 2026, but the central bank must balance growth and inflation for things not to spin out of control. ⁽³⁾
Sterling’s Sudden Fall and Gilt Yields Rise
The pound sterling suddenly fell more than 1% from 1.354 to below 1.340, making it the weakest currency traded in the G10 group. FX analysts stated growing concerns about the UK’s fiscal health as the main driver of the drop.
Investors are demanding a higher risk premium for sterling, indicating unease about the government’s ability to manage its finances. This factor led to the rise in government yields. ⁽⁴⁾
The fiscal concerns also pushed 30-year gilt yields higher to 5.7%, reaching their highest level since May 1998. 10-year gilt yields also rose to 4.78%, nearing 16-year highs. Rising yields signal higher borrowing costs for the government.
The surge in yields was also driven by problems worldwide due to concerns about rising debt and a weak global economic outlook. ⁽⁵⁾
Global Context and Bond Market Pressures
The UK is not alone in facing fiscal problems, France is facing public debt concerns following Prime Minister Francois Bayrou’s push for an austerity budget plan that could reduce France’s debt, which has sparked controversy across the French government.
France’s 30-year bond yields hit a 16-year high at 4.522, with other bond yields from major economies rising, triggering selloffs in riskier assets due to global concerns about high debt and high inflation. ⁽⁶⁾
In the US, Treasury yields jumped on Tuesday to begin September trading as a court decision knocking down most of the Trump administration’s tariffs raised the prospect of the government having to repay the money already brought in, stretching an already-stressed US fiscal situation. The benchmark 10-year Treasury yield rose more than 6 basis points to 4.287%. The 30-year bond yield climbed over 6 basis points to 4.978%. ⁽⁷⁾
US President Donald Trump’s tariffs are in focus after a federal appeals court on Friday ruled that most of his global tariffs are illegal. The court determined in a 7-4 ruling that only Congress has the power to implement sweeping levies.
Trump responded that the decision was “highly partisan” and that he will be appealing the ruling to the U.S. Supreme Court. ⁽⁸⁾
Sources: ⁽¹⁾ ⁽²⁾ Financial Times,⁽³⁾ ⁽⁴⁾ ⁽⁵⁾ ⁽⁶⁾ Reuters, ⁽⁷⁾ ⁽⁸⁾ CNBC
