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As yields soar: "Oil and water do not mix and neither do politicians and economics"

ended 09. January 2025

10-year gilt yields continued to rise Thursday morning as the bond market sell-off continued, while the Pound came under renewed pressure. Newspage asked economists and forex experts for their views. One, Tony Redondo of Cosmos Currency Exchange, was withering: “Oil and water do not mix and neither do politicians and economics." Trader David Belle of Fink Money added: "Rachel Reeves is having a nightmare. Unlike Truss, whose policy was due to collateral issues in the LDI market, the long end of the yield curve being pressured is a direct result of her anti-growth policies. You cannot 'public sector' your way to growth: growth comes from investment and private sector enterprise. The market right now has huge doubts about the creditworthiness of the UK where inflation is high and growth negative. This is a far cry from the US with their positive growth and relatively normal inflation. We are in stagflation, Reeves is fresh out of air and any fiscal headroom she had has completely vanished." Additional views below.

10 responses from the Newspage community

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Tony Redondo
Founder at Cosmos Currency Exchange
Oil and water do not mix and neither do politicians and economics. The result? Reeves' fiscal headroom has just evaporated. Between 1999 and 2002, Chancellor Gordon Brown sold 400 tonnes of UK gold reserves at $285-$300 per ounce, raising $3.5 billion. In October 2024, gold hit $2,800 an ounce. In October 2022, Liz Truss's borrowing and spending plans led to market turmoil, forcing the Bank of England to intervene to support overstretched pension funds. This week, UK bond yields have surged, with 30-year yields reaching their highest since 1998. Economists warn Chancellor Rachel Reeves may break her own fiscal rules leaving the UK facing further tax hikes at the Spring spending review on 26 March. The Pound is down over 2% since Christmas Day against the Euro and over 3% against the Dollar. The whole thing is a mess.
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Anita Wright
Chartered Financial Planner at Ribble Wealth Management
The UK is trapped in a vicious debt circle. It is almost impossible to get the deficits down. The Bank of England clearly hasn't got inflation under control, minimum wage and NI increase are being passed onto consumers in the form of higher prices. The bond market is saying, we’re pretty certain a second wave of inflation is coming back, similar to the 1970s. Markets now demand higher yields to compensate for inflation risk. The Bank of England is unlikely to be able to cut interest rates in this environment and therefore mortgage rates will at best stay where they are.
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Gabriel McKeown
Political & Economics Writer at Sad Rabbit - Substack Newsletter
With gilt yields surging to levels unseen since the late 1990s, the Bank of England has become the reluctant ringmaster in the UK's economic circus, juggling inflation concerns with growth worries, casting a long shadow over the Labour government's ambitious fiscal agenda. While the spectre of the mini-Budget era turmoil looms large, as the 30-year gilt yield has surpassed even the tumultuous peaks witnessed during the short-lived Truss administration, the current predicament presents a more nuanced picture. The pound's relative stability suggests that investors are repricing UK debt rather than abandoning it wholesale, however the gilt market's message is unequivocal: the era of cheap money is over and the bill for years of fiscal largesse is coming due. This rise in borrowing costs has effectively eviscerated Reeves' fiscal headroom, threatening to derail Labour's investment promises and potentially necessitate a painful recalibration of spending plans.
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Daniel Wiltshire
Actuary & IFA at Wiltshire Wealth
Reeves has painted herself into a corner here. Labour has made spending commitments it can't row back on. But the fundamental truth is the country's broke. The bond market knows this and will impose a heavy price.
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David Belle
Founder and Trader at Fink Money
Rachel Reeves is having a nightmare. Unlike Truss, whose policy was due to collateral issues in the LDI market, the long end of the yield curve being pressured is a direct result of her anti-growth policies. You cannot 'public sector' your way to growth: growth comes from investment and private sector enterprise. Taxes come from the private sector. Tax the private sector and this contracts demand. And while, for instance, train drivers keep being given pay rises, the trains are worse than ever, symptomatic of a unionised workforce having the private sector on strings. The market right now has huge doubts about the creditworthiness of the UK where inflation is high and growth negative. This is a far cry from the US with their positive growth and relatively normal inflation. We are in stagflation, Reeves is fresh out of air and any fiscal headroom she had has completely vanished.
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Philip Dragoumis
Director and Owner at Thera Wealth Management
Current yield levels have almost wiped out the fiscal headroom that the government has. Labour may find it will have to rein in spending given that it has already raised taxes considerably. Unlike the Truss mini-Budget debacle, the recent rise in gilt yields has been quite orderly and has more or less faithfully tracked the rise in US Treasury yields. These have risen over fears that Trump will stoke inflation by imposing trade tarriffs. However some UK specific factors do exist. The recent budget is expansionary and will increase borrowing while core inflation is still sticky. Bond markets have been very volatile however and you could see this rise reversed later in the year if growth disappoints and inflation comes in lower than expected.
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Prem Raja
Head of Trading Floor at Currencies 4 You
Investors are clearly not confident in the UK Government's ability to service its debts due to the weak economic outlook in the UK. On top of this, with a strong US economy we expect to see Cable move lower. GBP/EUR prices have also gone below the 1.20 level for the first time in over a month. Due to this move we will see the pressure grow on the Bank of England to cut interest rates in February, which is already priced in, to try and stimulate the UK economy. Otherwise further tax hikes may be on the horizon for the UK Government to be able to afford current debt levels. What's happening with yields right now could result in more fiscal pain for UK households and businesses.
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Roger Lane
CEO at Fort Advice Bureau
Rachel Reeves' ill-considered Budget is 90% of the cause as it is the exact opposite of what was required. Add to that the continual downbeat messaging from Labour and their dreadful beginning in Government, and it is no surprise things are deteriorating. Liz Truss's mini-Budget may have been a bit ill-conceived and incompetently presented, but the principle of tax less and small government had merit and may have been just what the UK needed. Perhaps the outlook now would be more positive if she hadn't been defenestrated so quickly.
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Darryl Dhoffer
Founder at The Mortgage Geezer
The Labour Government's Budget and the huge increases in public spending are a big contributor to Gilt yield increases, as the cost of borrowing goes up. Gilts are not directly associated with mortgage pricing, however the forecast for economic growth is looking gloomy for 2025, and with a slowdown expected on rate cuts, still high inflation, higher taxes and now public spending, that will cost more as gilt rates increase. It's a recipe for disaster.
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Kundan Bhaduri
Entrepreneur, Investor and Landlord at The Kushman Group
UK gilt yields are making headlines, with 10-year rates climbing to levels not seen since the 2008 financial crisis and 30-year yields reaching heights not seen since the late '90s. Meanwhile, the Pound is feeling the heat, sliding sharply against the Dollar. These movements raise significant questions about what’s driving the turbulence and where it might lead. Is this a signal of deeper economic shifts, or merely a reflection of markets recalibrating to shifting expectations? As monetary policymakers keep a watchful eye, the implications for interest rates and broader financial stability are mounting. For journalists, this is a story ripe with angles—market volatility, economic uncertainty, and the ever-present spectre of inflation. The key now is decoding what this means for the UK’s financial trajectory in 2024 and beyond.