MPs hear urgent question about rising borrowing costs
Shadow chancellor Mel Stride is asking an urgent question in the House of Commons now, about “the growing pressure of borrowing costs on the public finances”.
He is asking it on a morning in which the UK’s 10-year borrowing costs hit the highest since 2008, while 30-year bond yields reached the highest since 1998.
Although Stride is asking the question to chancellor Rachel Reeves, it will be answered by her deputy Darren Jones, chief secretary to the Treasury.
Jones tells MPs that financial markets are “always evolving”, and cites the long-standing convention that the government does not comment on specific market movements. He won’t break that convention today.
Jones says that changes to bond yields are determined by many factors, both international and domestic.
In recent months, financial market moves have been largely driven by “data and global geopolitical events”, Jones says, as they adjust to “new information”.
He declares:
UK gilt markets continue to function in an orderly way. Underlying demand for the UK’s debt remains strong, with a generally well-diversed investor base.
Jones cites an auction of five-year gilts yesterday, which received bids for three times as much debt as was on sale.
Key events
Labour MP Torsten Bell points out that the opposition are keen on spending increases, but oppose tax rises to pay for it.
Q: Isn’t one of the lessons of the developments recent days that we must pay for day-to-day spending through tax rises, however tough that is?
Chief secretary to the Treasury Darren Jones agrees that day-to-day bills need to be paid by day-to-day income.
Conservative MP Sir Edward Leigh tries to nail down how the government will keep within the fiscal rules.
Q: Will the minister give an absolute assurance there will be no more increases in tax or borrowing?
Darren Jones says he can absolutely assure Leigh that the spending review will be developed within the envelope laid out in the budget.
Liberal Democrat Treasury spokesman Clive Jones warns MPs that the Labour government is making some of the same mistakes as its predecessors.
He says Rachel Reeves has a very difficult job, having inherited an economy “on its knees due to Conservative mismanagement” (cue much groaning from some Tory MPs).
Jones cites the “terrible trade deal with Europe”, “soaring inflation”, “stagnant growth” and the Liz Truss mini-budget which hit mortgage holders across the country.
Q: Is protecting the NHS and healthcare also non-negotiable, as the government tries to balance the books?
Darren Jones says the NHS is one of the government’s “key commitments”.
He also suggests the opposition have a nerve groaning at Clive Jones’s comments – the public should be groaning at them, he argues.
Labour MP Meg Hillier asks what notice departments will get of further cuts they may need to make to meet the fiscal rules.
Darren Jones says the second phase of the spending review, to set budgets from 2026-27, is under way. The review will be concluded by June.
Chief secretary to the Treasury Darren Jones repeats that the fiscal rules are ‘non-negotiable”.
He doesn’t explicitly say whether that would mean tax rises or spending cuts, but does say that public services will have to ‘live within their means’.
He points out that the UK debt burden rose steadily since 2010, to pay for day-to-day spending, under the previous Conservative government.
Mel Stride adds that “regrettably”, the government could be on track to breach its fiscal rules.
Does the government stand by Rachel Reeves’s pledge not to raise taxes further, and does this mean that government spending will be cut if the OBR concludes that the fiscal headroom has ‘evaporated’, he asks.
Stride: Higher debt and lower growth are worrying consumers, firms and the markets
Shadow chancellor Mel Stride responds, demanding to know where Rachel Reeves is to answer today’s question.
Stride blames the chancellor’s decisions for pushing long-term borrowing costs up to a 27-year high.
The economy is now flatlining, he says, as business confidence has “simply evaporated”.
He tells MPs:
Higher debt and lower growth are understandably now causing real concerns among the public, amongst businesses, and in the markets.
Stride brushes aside Darren Jones’s argument that international geopolitical factors are influencing the bond market, pointing out that the UK’s borrowing premium over German bonds recently hit its highest level since 1990.
Darren Jones concludes his statement by reminding the opposition that the Conservative party “crashed the economy” with unfunded tax cuts and unrealistic public spending cuts.
Families across the country are still paying the price with higher mortgages and bills, Jones adds.
He also cites the “£22bn black hole” which Labour says it found upon taking office.
Jones: Government is committed to economic stability, sound public finances, and the fiscal rules
Darren Jones then tells MPs that he will not preempt the forecasts which the OBR will deliver for the spring statement on 26th March (which will show whether or not the UK is meeting the fiscal rules).
He adds:
There should be no doubt of the government’s commitment to economic stability and sound public finances.
This is why meeting the fiscal rules is non-negotiable.
MPs hear urgent question about rising borrowing costs
Shadow chancellor Mel Stride is asking an urgent question in the House of Commons now, about “the growing pressure of borrowing costs on the public finances”.
He is asking it on a morning in which the UK’s 10-year borrowing costs hit the highest since 2008, while 30-year bond yields reached the highest since 1998.
Although Stride is asking the question to chancellor Rachel Reeves, it will be answered by her deputy Darren Jones, chief secretary to the Treasury.
Jones tells MPs that financial markets are “always evolving”, and cites the long-standing convention that the government does not comment on specific market movements. He won’t break that convention today.
Jones says that changes to bond yields are determined by many factors, both international and domestic.
In recent months, financial market moves have been largely driven by “data and global geopolitical events”, Jones says, as they adjust to “new information”.
He declares:
UK gilt markets continue to function in an orderly way. Underlying demand for the UK’s debt remains strong, with a generally well-diversed investor base.
Jones cites an auction of five-year gilts yesterday, which received bids for three times as much debt as was on sale.
This morning’s market gyrations are moving the London stock market.
The domestically-focused FTSE 250 index of medium-sized companies has dropped to a nine-month low this morning, down around 0.6%.
But the more internationally-focused FTSE 100 share index has risen by 0.6%. It’s been driven by multinational firms, such as miners, whose overseas earnings become more valuable in sterling terms when the pound falls.
Retailers are among the fallers, following this morning’s Christmas trading updates, as are house-builders who will suffer lower demand if interest rates remain high.
The current market moves are not a repeat of the panic of 2022, says Kit Juckes, currency expert at French bank Société Générale.
He points out that the moves are smaller than after the Truss/Kwarteng mini-budget, and due to different reasons:
The similarity between what has gone into folklore as the ‘Truss Crisis’ and the current situation is that sterling and gilt yields have moved sharply in opposite directions.
The extent of the move is much smaller so far, and I doubt it will become as critical. In 2022 a new PM, with her new Chancellor, came up with a bafflingly ill-considered set of Budget proposals and triggered a crisis of confidence. Even then, the September 2022 fall in GBP/USD from 1.16 to 1.05 was fully reversed by the end of October and so was the spike in gilt yields.
What has happened this time, is that the increase in employers’ national insurance contributions announced at the Budget appears to have put the brakes on growth to a greater extent than (I, for one) expected. Deteriorating public finances may force unhelpful fiscal tightening sooner than expected.
A global bond sell-off doesn’t help and gilts having a worse time than others support the idea that the pool of investors who will step in to ‘buy the dip’ in gilts isn’t what it was pre-Brexit. Especially in thin post-New Year markets.
UK firms plan to raise prices and cut workers after Nics increase
More than half of UK firms are planning to raise prices or cut jobs in response to Rachel Reeves’s increase in employers’ national insurance contributions, a new survey from the Bank of England shows.
The Bank has polled chief financial officers from small, medium and large UK businesses, and asked how they expect to respond to the increase in employer National Insurance contributions that were announced in the Autumn Budget.
It found that 61% of firms expect to lower profit margins, 54% expect to raise prices, 53% expect lower employment and 39% expect to pay lower wages than they otherwise would have done.
Firms were allowed to select more than one option, the Bank says.
Parliament to hear urgent question on bond market turmoil
The bond market sell-off will be discussed in parliament today.
Shadow Chancellor Mel Stride has been granted an urgent question, “to ask the Chancellor of the Exchequer if she will make a statement on the growing pressure of borrowing costs on the public finances’.
Also confirmed:
Urgent Question from Shadow Chancellor of the Exchequer @MelJStride: “To ask the Chancellor of the Exchequer if she will make a statement on the growing pressure of borrowing costs on the public finances.”
— UK House of Commons (@HouseofCommons) January 9, 2025
The parliamentary discussion is expected to begin around 10:30am, Reuters reports.
Bond trading giant Pimco has thrown Rachel Reeves a lifeline, saying it is still positive about UK government debt.
Pimco economist Peder Beck-Friis told Reuters last night that much of the increase in UK yields has been driven by the market for US debt.
Beck-Friis says:
“Although UK-specific factors, such as the budget, have contributed to the rise, most of the increase has been driven by rises in U.S. Treasury yields during the same period.”
Beck-Friis added, though, that chancellor Rachel Reeves may need to find new savings as a result of the rise in borrowing costs, to keep within her borrowing rules
He points out:
“Both weaker growth and higher interest rates put pressure on public finances.
If the current trends of rising yields and slowing growth persist, the chances of spending cuts or tax increases will increase for the government to adhere to its new fiscal rules.”
Bond yield sell-off eases, amid ‘crisis of confidence’ in gilt market
The sell-off in UK government debt is easing slightly.
The yield on 10-year UK gilts is now up just 4bps at 4.834% (from a close of 4.795% last night). It had earlier risen by over 10 basis points to a new 16-year.
But even so, Kathleen Brooks, research director at XTB, says there is no doubt that the market for UK gilts (government debt) is experiencing “a crisis in confidence”.
Brooks says the UK’s fiscal position continues to look perilous this morning, adding:
The sell off in UK bonds this week, is a warning shot from the bond vigilantes. The UK is reliant on investors to fund its deficit.
The UK is not unique in needing this, however, the US can fund its deficit more easily because the US dollar is the reserve currency, and the Eurozone as a whole runs a surplus.
Since the market’s focus so far in 2025 has turned to the sustainability of public sector finances, the UK is understandably in the firing line.
Brooks adds that were are “not in a Liz Truss style moment”, because pension funds have changed their structures so they are less exposed to a rapid and unexpected rise in Gilt yields.
After the 2022 mini-budget, a ‘doom loop’ broke out as pension funds were forced into a fire sale of bonds as prices fell, which fuelled the sell-off.
Richard Partington
One City analyst said last night the Treasury’s unusual step to comment on the bond market could be being taken by hedge fund investors as “the scent of blood in the water” as Reeves battles to maintain authority.
Brad Bechtel, global head of foreign exchange at Jefferies, said the sell-off in the pound showed the UK was seeing a “micro version” of the bond market meltdown witnessed after Liz Truss’s 2022 mini budget.
Bechtel said:
“UK gilts continue to melt down and that has so far not impacted the currency as much as it did during the Liz Truss episode, that is until today.
“The pound seems to be reacting to gilts more and more and that means we are spilling further and further into fiscal emergency territory.”
“We don’t ‘feel’ like we are in the same Liz Truss zone right now, mostly because we haven’t seen an LDI blow up, but we are in a micro version of that for sure.”
However, other analysts said the comparisons with the short-lived prime minister’s tenure were overblown.
“It’s nice to talk about this as being a Truss moment. Those comparisons are easy and obvious. But we’re a long way from that,” said Mark Capleton, an analyst at Bank of America.
“Though in level terms we’re higher than then, there has since been a big global sell off, and it has been far more gradual by comparison.”
He said nine of the top 10 daily movements in the gilt market since 1992 had come during 2022. “We’re a long way from that.”
However, he added:
“Obviously people are concerned about a vicious circle with the fiscal arithmetic and the possibility that a further rise in yields could create the need for tightening measures from the chancellor in March.”
