MARKET NEWS

(Bloomberg) -- UK markets suffered a fresh selloff on Tuesday, with the yield on long-dated bonds hitting the highest since 1998 and the pound tumbling, as pressure mounted on Prime Minister Keir Starmer to win the confidence of investors in the government’s budget.

The nation’s assets have become increasingly prone to bouts of weakness as the UK’s precarious fiscal position and stubbornly high inflation make it a target. The problem for Chancellor of the Exchequer Rachel Reeves is that each rout pushes up the debt costs and worsens the fiscal backdrop even more, leaving the economy at risk of ever-higher borrowing costs.

Reeves is due to deliver a budget before the end of the year, and the chancellor is scrambling to find savings or raise taxes to plug what Bloomberg Economics estimates is a £35 billion ($47 billion) budget hole without depressing economic growth. That may prove politically difficult, given the government had to U-turn on welfare reforms after a rebellion among lawmakers.

“The situation in the UK is quite dangerous at the moment because of the return of the bond vigilantes,” said Ludovic Subran, Allianz chief investment officer. “What is striking is that it took so long to factor in the return of inflation into gilts. Forward guidance on the fiscal side will be needed.”

Yields on 30-year gilts jumped as much as eight basis points to 5.72% on Tuesday and the pound weakened as much as 1.5% against the dollar, the biggest drop since April as the currency lagged its major peers. The FTSE 100 Index retreated 0.9% and an index of domestic stocks fell 2.2%.

When questioned on the topic in the House of Lords, Treasury Minister Spencer Livermore said gilt yields have risen in line with global peers and moves have been orderly.

“Our commitment to the fiscal rules is non-negotiable and we have a clear plan in place to put the public finances on a sustainable path,” Livermore added.

While record demand for a sale of 10-year government bonds Tuesday appeared to buck the trend, the debt was sold at a discount to the secondary market, which made the high yields hard for investors to resist. The UK’s benchmark 10-year yield is the highest among Group-of-Seven nations, trading up six basis points at 4.81% on Tuesday — the highest levels since January.