By Emese Bartha and Renae Dyer
Yields on U.K. government debt rose to their highest levels since 1998 while the British pound continued to sag against the dollar, amid investor worries about the increasing levels of government borrowing and a generally lackluster economy.
The yield on the 30-year gilt, as U.K. government bonds are called, hit 5.455% Thursday.
The pound fell 0.6% to $1.2291 after touching $1.2239 earlier in the session, the lowest since November 2023, according to FactSet.
"The gyrations seen in U.K. gilts have been extreme, with investors particularly concerned over the outlook for Britain's economy and the state of public finances," said Ebury head of market strategy Matthew Ryan.
The surge in yields began Tuesday following weak demand at an auction of 30-year gilts. Bond yields rise when prices fall.
The gilt market weakness mirrors a recent jump in bond yields globally, particularly among U.S. Treasurys. After expectations of steady interest-rate reductions in recent months, inflation in many places around the world continues to prove sticky, forcing investors to reevaluate those bets and sell off bonds.
What alarms investors about U.K. debt, in particular, is that a continued sell off in gilts could pose problems for government finances, potentially forcing Treasury chief Rachel Reeves to either raise taxes further or cut public spending to ease investor worry.
Either move would risk denting fragile U.K. economic growth even further. Reeves's autumn budget included tax rises and high borrowing in order to fund investment and stimulate growth.
The concurrent fall in the pound demonstrates how investors have been taking on an increasingly bearish view of the U.K. economy more generally. Typically, a currency rises when bond yields increase.
Sticky inflation, government spending, higher U.S. bond yields and high levels of U.K. government-bond issuance will likely keep gilt yields rising, ING rates strategists Michiel Tukker and Benjamin Schroeder said in a note.
The bond market action has evoked memories from late 2022 when former Prime Minister Liz Truss's controversial budget--including large-scale unfunded tax cuts--caused gilt yields to jump and sterling to slide. The market turmoil forced Truss's resignation and helped set the stage for Reeves's Labour party to win decisively in last year's general election.
Some analysts cautioned that the situation is still a far cry from that crisis.
"This is more likely just an overreaction to gilts hitting key technical levels that were last associated with the bond market turmoil under former Prime Minister Liz Truss," Monex Europe currency analyst Nick Rees said.
Mike Riddell, portfolio manager at Fidelity International, said the gilt selloff has grabbed the headlines but pointing fingers at the government might be misplaced.
"This would miss the point; it is mainly a global fixed income story," he said.
Write to Emese Bartha at emese.bartha@wsj.com and Renae Dyer at renae.dyer@wsj.com
(END) Dow Jones Newswires
01-09-25 0733ET