Pound Hits Year-Low as Markets Watch £1B UK Government Debt Auction

Key Takeaways

• The British pound fell to its weakest point in over a year amid growing concerns over the U.K. bond market.
• The rise in borrowing costs has triggered concerns about Chancellor Rachel Reeves’s ability to meet her fiscal rules.
• Analysts warn that the U.K.’s fragile fiscal position could lead to severe austerity measures.

The pound has plummeted  to its lowest level in 14 months as heightened concerns over U.K. assets continue to rattle the financial markets.

Analysts attribute the pound’s struggles  to a global bond market sell-off, which has shaken confidence in the U.K.’s financial stability.

With the pressure mounting on Chancellor Rachel Reeves, questions about the government’s fiscal strategy are intensifying.

Pound Hits 14-Month Low

The pound recovered on Tuesday after hitting 14-month lows on Monday, as U.K. government bonds regained some of the ground lost following a significant sell-off.

Sterling held steady at 1.22 against the U.S. dollar  in early trading after it recently dropped to its lowest level since November 2023.

Government borrowing costs showed signs of stabilizing, with 10-year U.K. government bond yields , also known as Gilts, dipping by three basis points to 4.86%.

On Monday, the yield on 30-year gilts reached its highest level in 27 years, while 10-year yields hit new highs not seen since 2008.

Yields serve as a crucial indicator of market confidence, rising when investors are less inclined to hold bonds, which results in lower bond prices.

In an official comment shared with CCN, Deutsche Bank analysts said: “It’s clear that investors remain bearish in the near term, as one-week risk reversals for sterling against the dollar show that sentiment hasn’t been this bearish since November 2022, in the aftermath of Liz Truss’ premiership.”

“The next focal point will be the UK CPI report tomorrow morning,” they added.

Market Awaits Further Bond Sale

The Treasury is set to sell an additional £1 billion  in government debt today, posing a significant challenge for Rachel Reeves amid recent financial market turmoil.

The U.K.’s Debt Management Office will conduct an auction for 30-year inflation-linked Gilts following a surge in long-term government borrowing costs to a new 27-year high.

The pound’s weakness raised concerns about the Chancellor’s ability to adhere to fiscal rules. Reeves has seen her £10 billion budget buffer eroded by rising bond yields, with the 10-year Gilt coupon reaching its highest level in 16 years.

For six consecutive days, yields on both 10-year and 30-year gilts have risen, partly due to concerns about inflationary policies under Donald Trump’s potential return to office.

Reeves’ Policy Weighs On Sterling

The increase in borrowing costs may force Chancellor Rachel Reeves to reduce spending or raise taxes to stay within her fiscal targets.

Last night, Reeves reassured the public , stating that she had an “iron grip” on the nation’s finances, with a Treasury spokesperson adding:

“No one should be under any illusion—meeting the fiscal rules is non-negotiable, and the Government will maintain strict control over public finances.”

However, Reeves is now facing a forex market issue and a bond market challenge. Following a rise in the government’s borrowing costs, with the 10-year debt rate reaching its highest level since 2008, the Chancellor risks breaching her fiscal rules.

For the last 15 years, Western governments have benefited from cheap borrowing due to low interest rates, a legacy of the 2008 financial crisis.