Market News

By Adrian Kerr

U.K. borrowing costs and the British pound steadied Tuesday, as Treasury Chief Rachel Reeves faced questions in Parliament around the recent turmoil in bond markets.

The 10-year gilt yield was pretty much flat at 4.883% late afternoon in London, according to Tradeweb. The 30-year gilt yield was up one basis point at 5.440%. Long-dated gilt yields hit multi-year highs last week, part of a global fall in bonds amid investor concerns over the slower pace of rate cuts by the U.S. Federal Reserve.

An auction of the 30-year index-linked gilt on Tuesday attracted relatively strong demand, with the real yield edging slightly lower afterward.

The pound also steadied after it fell on Monday to a two-year low against the dollar and its weakest in 10 weeks against the euro. It was recently at $1.2208, having fallen as low as $1.2100 on Monday, according to FactSet.

Under-fire U.K. Treasury Chief Rachel Reeves appeared in Parliament Tuesday afternoon in London after returning from a visit to China and in the wake of the recent surge in U.K. borrowing costs that could threaten the government's spending plans.

Reeves told lawmakers that the U.K. government will stick to its borrowing rules despite the recent rise in borrowing costs.

Slower-than-expected growth and the prospect of higher interest costs may see the government breach its rules unless it cuts spending or raises taxes, economists say. In response to a lawmaker's question, Reeves declined to rule out spending cuts.

"I'm not going to write five years of budgets," she said Tuesday.

"The bond market is stable in the aftermath of her speech. However, she did not deliver a knockout blow, and the bond vigilantes have not been put to bed," said Kathleen Brooks, research director at XTB, in a note.

The gilt market weakness mirrors a recent jump in bond yields globally, particularly in U.S. Treasurys. After expectations of steady interest-rate reductions in recent months, inflation has proven stubborn in many areas, forcing investors to re-evaluate those bets and sell off bonds.

The stabilization in U.K. assets comes as global markets overall were calmer Tuesday.

Still, the 10-year U.K. government bond yield could surge to 5.0% and beyond if U.K. inflation data on Wednesday come in stronger than expected, ING's Francesco Pesole said in a note.

U.K. annual CPI is forecast at 2.6% in December, according to a Wall Street Journal poll of economists. "Should that come in hotter than expected, selling pressure can intensify into the 5.0% handle and potentially beyond," Pesole said.

U.S. CPI is also due Wednesday.

-Paul Hannon, Emese Bartha and Miriam Mukuru contributed to this article.

Write to Adrian Kerr at [email protected]