Fears over UK borrowing costs as US jobs figures prompt bond market volatility | Economics

Concerns over the UK government’s borrowing costs were revived on Friday after stronger than expected US jobs figures triggered volatile conditions in global financial markets.

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In an accelerating global bond market sell-off, investors warned that the UK was particularly exposed amid growing fears over stubbornly high inflation and higher for longer interest rates.

Markets are no longer fully pricing in two Bank of England base rate cuts in 2025 and research out on Friday found that almost 700,000 UK homeowners are facing an increase in mortgage costs when their fixed-rate deals end this year.

At the end of a turbulent week in global markets, bond yields rose sharply for governments worldwide, before falling back, after the last jobs report of the Biden administration showed the US labour market grew strongly in December.

The number of new jobs added in the world’s largest economy accelerated to 256,000, up from 227,000 in November, easily beating expectations of a smaller increase.

Investors said the figures signalled resilience in economic growth and inflationary pressures, reducing the chances of interest rate cuts from the US central bank, the Federal Reserve, amid fears of high inflation becoming entrenched across advanced economies.

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“For global bonds, the strength of the US jobs report just adds to their challenges. The peak for yields has not yet been reached, suggesting additional stresses that several markets, especially the UK, can ill afford,” said Seema Shah, the chief global strategist at the fund manager Principal Asset Management.

It comes amid warnings that the higher cost of borrowing could threaten Rachel Reeves’s fiscal rules. The Guardian understands the Treasury has begun considering cuts to public services to avoid breaking the chancellor’s “non-negotiable” rules after a bruising week for the government.

The yield – in effect the interest rate – on UK government bonds, known as gilts, rose after the US job market data to near levels recorded on Thursday, before falling back slightly as investor jitters persisted. Gilt yields have risen sharply in the past three months, fuelled by global developments but also domestic concerns, pushing the UK’s long-term borrowing costs to the highest levels since 1998.

The pound fell by nearly a cent, or 0.7% against the US dollar, as the US currency rose sharply against other leading international currencies. Share prices fell on both sides of the Atlantic.

City analysts said UK borrowing costs could be dragged higher by the gyrations in global markets. As the world’s largest and most important bond market, shifts in the US typically have an impact on borrowing costs elsewhere.

The increase in borrowing costs has been particularly marked for the UK amid investor concerns about near flatlining economic growth and sticky inflation. These have forced the Bank of England to keep interest rates higher for longer, as well as caused the government’s delicate financial position.

Economists have warned a sustained rise in borrowing costs could sweep away a £10bn buffer that Reeves had kept in reserve at the autumn budget to meet her primary fiscal rule, which requires day-to-day spending to be matched by tax receipts.

The key determinant will be updated forecasts from the Office for Budget Responsibility (OBR), the Treasury watchdog, when it gives its next outlook for the economy on 26 March – stoking speculation that the chancellor could be forced to announce tax increases or spending cuts.

Reeves had been planning to make a low-key statement alongside these spring forecasts, but Treasury sources have signalled that OBR forecasts showing a breach in the fiscal rules would not be allowed to pass without action to remedy this.

The Treasury has indicated spending cuts would be preferred to raising taxes after repeated promises by Reeves not to come back with further revenue-raising measures after her £40bn tax-raising October budget.

Analysts at the Resolution Foundation said that calm returning to the bond markets could help the chancellor. “Now that she is faced with bond market jitters, the chancellor should hold course before making major fiscal decisions that would have very real consequences for households,” they said.