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The British government sought to calm jitters in UK bond markets on Thursday by pledging to stick to its fiscal rules even as borrowing costs hit their highest level since the financial crisis.
Darren Jones, the UK Treasury’s number two, appeared in parliament to answer urgent questions on market turmoil as the 10-year nut yield rose to 4.93 percent, the highest since 2008, and the pound fell up 1 percent against the dollar to its lowest level in more than a year.
“UK nut markets continue to operate as normal,” Jones told MPs. “There should be no doubt about the government’s commitment to economic stability and sound public finances. This is why compliance with fiscal rules is non-negotiable.”
Jones’s appearance came after Sir Lindsay Hoyle, the Speaker of the House of Commons, accepted an urgent question from the Tory opposition about the “increasing pressure of borrowing costs on the public finances”.
Chancellor Rachel Reeves, who is about to embark on a long-planned trip to China, sent Jones, the chief secretary to the Treasury, to respond.
The 10-year yield rose 0.12 percentage points before yields rose to leave yields flat on the day at 4.8 percent. Yields move inversely to prices.
Sterling was caught in the sell-off, falling to $1,224, the weakest since November 2023, before staging a partial recovery to $1,228
“The sell-off in the pound and walnuts reflects a deterioration in the UK’s fiscal outlook,” said analysts at Brown Brothers Harriman.
UK borrowing costs have risen sharply as investors worry about the government’s heavy borrowing needs and the growing threat of stagflation, which combines weak growth with ongoing price pressures.
Jones argued that it was normal for walnut prices to fluctuate and that there was still strong underlying demand for UK government bonds.
“The last auction held yesterday received three times more bids than the amount offered,” he said.
The minister said the Treasury was still working on a multi-year spending review due this summer based on assumptions set out in October’s budget.
However, he acknowledged that the Office for Budget Responsibility, the independent budget watchdog, will come up with new forecasts on March 26, which could then influence discussions with ministers.
Recent bond market stresses also raise the specter of tax hikes or spending cuts. The Treasury has signaled that, if necessary, it will cut spending rather than raise taxes.
Shadow chancellor Mel Stride, who asked the urgent question, said Reeves should have attended parliament himself.
“Where’s the chancellor?” he asked. “It is a bitter regret that in this difficult time, with these serious issues, she herself is nowhere to be seen.”
He later called on Reeves to cancel her trip to China “and focus on this country instead” as he attacked Labour’s “panic attempt to reassure the markets about their economic mess”.
Reeves left herself a small £9.9bn headroom against her revised fiscal rules in last year’s autumn budget even after announcing a £40bn package of tax rises aimed at “wiping out the proposition” in finance public.
The chancellor’s key fiscal rule is a pledge to fund all day-to-day public spending with tax bills by 2029-30.
Rising yields on government debt have put that tight budget space under threat. 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.
“Investors are looking for some kind of guidance from somebody, but the government has just said there is no problem,” said Tomasz Wieladek, chief European economist at T Rowe Price. “The Bank of England will hold this for as long as possible,” he added, saying the moves were not big enough to merit anything beyond a verbal response from policymakers.
The nut market could experience another period of selling on Friday, analysts said, if closely watched U.S. jobs data pushed yields higher on U.S. Treasuries, dragging them along.
“It could get extremely bleak for wages if we see a strong payroll,” said Pooja Kumra, a UK rates strategist at TD Securities.
Analysts have said the simultaneous sell-off in clay and the pound echoed the reaction caused by Liz Truss’ “mini” budget in 2022.
But many investors think the situation is short for the 2022 crisis.
“I foresee things starting to come to a head. . . On the embankments, the washout has already happened last year,” said Geoffrey Yu, a senior strategist at BNY. “I’m not denying that there are problems in the UK, but to suddenly compare to 2022, I think pushes things.”
