UK government debt prices have taken an unnerving journey south in the past few days. The closely watched ten-year bond has now hit a yield of 4.3%, taking it within a fraction of the level that caused a crisis in autumn 2022.
The cause that time was Liz Truss’s mini-budget, which investors decided jeopardised the public finances, prompting them to dump UK government bonds so aggressively that leading pensions funds were in danger of collapse until the Bank of England intervened.
To find out why the is UK back at the brink and how dangerous it could be this time around, we spoke to David McMillan, a Professor of Finance at the University of Stirling.
Why are bond yields close to crisis levels again?
The simple answer is inflation. The annual headline rate came down to 8.7% in April compared to double figures in March – that was expected because April was the first month in 2022 to see a big inflation jump after the Ukraine invasion, so the year-on-year comparison is less severe now. But it was expected to be down to 8.2%, so it has been a disappointment.
This is mainly because of core inflation, which strips out things like food and energy that fluctuate a lot. Central banks like the Bank of England use core inflation as a more stable projection of where prices are going, and it rose to 6.8% compared to 6.2% in March. The bank was probably not expecting that to happen. Service sector inflation is also sticking around the 7% mark.
The chancellor is saying that a recession is a price worth paying for curbing inflation.
A week ago the consensus was that the Bank of England maybe wouldn’t have done any more interest rate rises after 12 in the past 18 months, especially with the US Federal Reserve apparently now pausing, but now the expectation is a few more 0.25 point rises: maybe a total of 0.75 points or even 1 percentage point over the next year. Bond yields are rising to reflect that.
