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UK government borrowing costs rose on Friday but remained below Thursday’s peak as investors await a key US jobs report later in the day.
The 10-year walnut yield rose 0.04 percentage point to 4.85 percent, but was still below the 4.93 percent touched on Thursday, which was the highest level since 2008. Yields move in opposite to prices.
Sterling, which fell 0.5 percent on Thursday, eased against the dollar, falling 0.1 percent to $1.229.
Gilts have suffered in recent sessions amid a global rise in government bond yields driven by rising inflation in several major economies.
Friday’s jobs data would be “important to keep the market calm,” given that U.S. Treasuries are a key driver of walnuts’ performance, said Gordon Shannon, a portfolio manager at TwentyFour Asset Management. .
Longer-term, the walnut market “needs Reeves to signal some sense of the tougher global backdrop by cutting spending, while we expect a decline in testing to make gilts attractive enough to international buyers,” he added.
The UK has been hit particularly hard by the global bond sell-off as investors worry about the government’s heavy borrowing needs and the growing threat of stagflation, which combines anemic growth with persistent price pressures.
The credibility of the government’s economic plans is vulnerable to strains in the bond market after Chancellor Rachel Reeves left herself just £9.9bn of headroom against her revised fiscal rules in last year’s Autumn Budget.
Pooja Kumra, a UK rates strategist at TD Securities, said how Reeves handled the lack of fiscal space would be key.
“Investors are asking what the chancellor’s next option will be. . . spending cuts, more borrowing or taxes,” she said.
Nut sales have effectively wiped out Reeves’ budget crunch room, economists have estimated. The level of bond yields is an important determinant of budget space, given its implications for the government’s interest bill, which exceeds £100bn a year.
Labor has sought to reassure investors this week, with Darren Jones, the number two at the UK Treasury, telling MPs on Thursday that the government was committed to “economic stability and sound public finances”.
