UK long-term borrowing costs hit 27-year high, and pound falls, in pre-budget blow for Labour – as it happened

Time to wrap up, after a day of drama in the bond markets.

A quick recap:

The UK’s long-term borrowing costs have reached their highest level since 1998, amid a global bond market selloff.

The yield, or interest rate, on Britain’s 30-year bonds rose as high as 5.72% today, over the previous 27-year high set in April.

Analysts said concerns over the UK’s public finances were hitting the bond market, amid speculation that chancellor Rachel Reeves will unveil new tax rises in the autumn budget to keep within the fiscal rules.

The pound also had a bad day – it’s fallen by more than one and a half cents against the US dollar today to $1.338, on track for its worst day since early April.

Raffi Boyadjian, lead market analyst at XM, sums up the day:

The yield on 30-year gilts has jumped to the highest since 1998 following UK Prime Minister Starmer’s minor reshuffle of his ministers yesterday that did little to restore confidence in the government’s economic credibility. Instead, fresh questions have been raised about whether Starmer will replace Rachel Reeves as finance minister with someone who is less committed to tackling the country’s large fiscal hole.

The pound is plummeting as a result, falling more than 100 pips against the dollar and briefly tumbling below $1.34.

Despite the bond market jitters, the UK managed to sell more than £14bn of new debt today, but at the highest cost since 2008.

Lale Akoner, global market analyst at Etoro, says:

“From an investor’s perspective, today’s gilt sale is a double-edged signal. On one hand, elevated yields offer an attractive entry point into UK sovereign debt, especially for institutions seeking long-duration assets with reliable income. The fact that demand was more than 10x oversubscribed suggests gilts are firmly back on the radar as a yield play. Strong demand shows that gilts remain attractive as yields near multi-decade highs, offering compelling returns versus global peers.

“On the other hand, the sharp rise in borrowing costs reflects concerns about fiscal sustainability and inflation risk, which could keep yields volatile. For the government, this creates a paradox: market confidence in UK debt is robust, but financing that debt is increasingly expensive, constraining budget flexibility and raising the stakes for fiscal discipline ahead of the Autumn Budget.”

Here’s our news story on the bond market drama:

Stocks are falling in New York at the start of trading, as traders react to today’s losses in the bond market.

The Dow Jones industrial average, which tracks 30 large US companies, has shed 1.1% in the first few minutes of the session. It’s down 531 points at 45,013 points.

The broader S&P 500 index is also sharply lower – down 1.2%.

Recent reports about the various measures which Rachel Reeves might announce in the budget have worried bond investors, says Marcus Jennings, fixed income strategist for Global Unconstrained Fixed Income at Schroders.

Potential measures reported in recent weeks include a new tax on the sale of homes worth more than £500,000, or possibly applying national insurance (NI) to the rental income received by landlords.

Jennings explains:

“We have seen a flurry of potential policies announced that could make it into the Budget later this year. Broadly speaking, whilst no specific policy has caused a selloff in government bonds in isolation, the rush of potential policies is a reminder of how challenged the UK’s fiscal position is. This has likely facilitated a move higher in yields in the UK, notwithstanding the global move in long end yields.”

However, “international factors” are also a factor driving up gilt yields, he adds:

With expansionary fiscal policy in Germany, and no sign of budget deficits being meaningfully curtailed in the US, the narrative is growing that globally governments remain in difficult fiscal positions. Given the starting point of high UK government debt, this makes the UK and gilts particularly vulnerable.”

Bond markets have put Rachel Reeves “on a report card at the start of term”, comments Susannah Streeter, head of money and markets at Hargreaves Lansdown.

As she explains – the problem with raising taxes (as seems likely) is that it slows growth:

The UK Chancellor is facing highly difficult choices in the upcoming Budget, and she’s been dealt a warning by gilt investors.

They are selling off UK government debt, clearly concerned that the government may be losing its grip on the public finances. This is reflected in the rise in 30-year UK gilt yields which hit 5.71%, highs not seen since 1998. With so many options for raising taxes being bandied about during the summer, there appears to be concern that the decisions made might not be sufficiently thought through.

The worry isn’t just that government coffers won’t be replenished, but that they will be filled at the expense of growth, leading to a vicious circle emerging.

The selloff in sterling against the US dollar is gathering pace, as Wall Street traders return to their desks after the long weekend (for the Labor Day holiday).

The pound is now down by 1.6 cents, or 1.2%, against the dollar at $1.338.

That would be its biggest fall since 7 April, in the market mayhem after Donald Trump announced new tariffs against US trading partners.

The buy now, pay later company Klarna has announced the launch of its much-anticipated initial public offering (IPO), which could value the Swedish firm at more than $14bn.

The fintech firm confirmed on Tuesday that it would be offering more than 34 million shares, priced between $35-$37.

That could push its Klarna’s valuation to more than $14bn.

Reports last week suggested that Klarna shares could be priced at $34-$36, leading to a valuation of between $13bn-$14bn.

Klarna will now kick off its investor roadshow, with a date for its market debut on the New York Stock Exchange due to take place in the coming week (a date is still to be confirmed).

Klarna was widely expected to launch its IPO earlier this year, but market volatility - caused by Donald Trump tariff policies - reportedly forced the company to stall plans for its debut, which is now proceeding in full force.

A trio of Wall Street banks – Goldman Sachs, JP Morgan and Morgan Stanley – will be join book runners for the proposed offering.

The IPO punctuates a revival for Klarna, which saw its valuation slashed from a peak of $46bn to $6.7bn between 2021 and 2022, after a tough period in which a surge in interest rates led to an industry-wide re-rating of global tech firms. That led to Klarna to cut hundreds of, ultimately shedding about 10% of its then 7,000-strong global workforce.

Klarna has since returned to strength, reporting a profit of $21m for 2024, compared to a $244m loss a year earlier.

The announcement is likely to pave the road for other fintechs, which have been waiting for market conditions to improve - and a sector juggernaut to lead the way - before launching their own IPOs.

Newsflash: Carmaker Jaguar Land Rover has been hacked.

JLR has just released a statement, explaining that it has been “impacted by a cyber incident”.

It explains:

We took immediate action to mitigate its impact by proactively shutting down our systems. We are now working at pace to restart our global applications in a controlled manner.

At this stage there is no evidence any customer data has been stolen but our retail and production activities have been severely disrupted.

The US government’s long-dated borrowing costs are also rising, in what Marketwatch are now calling a “worldwide bond market rout”.

The yield (interest rate) on 30-year Treasury bills has risen to 4.98% this morning, its highest level since July.

That’s a rise of 6 basis points (0.06 percentage points), a slightly larger rise than we’ve seen for UK 30-year gilt yields today (which is up 4 basis points at 5.68%, a 27-year high).

Daniela Sabin Hathorn, senior market analyst at Capital.com, says inflation fears, predictions of US interest rate cuts, and worries about the Trump trade war are all pushing up America’s long-term borrowing costs.

Hathorn explains:

• Perceived pressure on Fed independence. Markets interpreted the headlines around reshaping the Fed’s leadership and the chatter about removing sitting officials as an effort to stack the Board with more dovish policymakers. The signal: a lower policy path than the economy might otherwise warrant.

• Inflation and institutional risk premia. If policy is expected to be looser, the long end embeds extra cushion for inflation uncertainty and institutional trust risk—both of which push yields higher at the back.

• Policy/legal noise around tariffs. Parallel legal questions over the scope of presidential tariff powers add another layer of uncertainty. Even without a near-term decision, that policy overhang nudges investors to demand more long-dated compensation—and seek hedges elsewhere.

There’s big corporate news this morning – food giant Kraft Heinz is splitting itself up, a decade after being created through a massive merger.

Kraft Heinz plans to split into two companies – one focusing on the sauces business and the other on groceries. It’s an attempt to revive growth after years of underwhelming sales.

Miguel Patricio, executive chair of the Kraft Heinz board, says:

“Kraft Heinz’s brands are iconic and beloved, but the complexity of our current structure makes it challenging to allocate capital effectively, prioritize initiatives and drive scale in our most promising areas.”

Back in 2015, Warren Buffett and the Brazilian private equity company 3G bought Kraft Foods in a $40bn deal, and marged it with HJ Heinz, which they already owned.

The deal was not Buffett’s finest hour – last month, his Berkshire Hathaway group took a $3.76bn write-down on its stake in Kraft Heinz, acknowledging the decade-old investment hasn’t worked out as hoped.

Despite the selloff in the bond market today, Britain has seen high demand from investors in a new debt sale this morning – but it has also paid a steep price to sell the debt.

The UK’s Debt Management Office sold £14bn of new 10-year government bonds at an auction today, and attacted over £140bn of orders!

The new debt will be priced to give a yield 8.25 basis points above the current 10-year benchmark gilt, Reuters reports.

And that means the cost to the taxpayer of Tuesday’s new issuance looks set to be the highest for 10-year debt since 2008, Reuters adds.

That, and the rise in 30-year bond yields this morning, both highlight the fiscal challenges facing Britain ahead of the autumn budget.

Over in the eurozone, inflation has risen over the official target.

Consumer price inflation picked up to 2.1% in August, new data from statistics body eurostat shows. This is the first time since April that the CPI index has risen above the European Central Bank’s 2% target.

Eurostat reports that food, alcohol and tobacco prices rose by 3.2%, while services inflation dipped to 3.1%.

Industrial goods prices were 0.8% higher than a year ago, while energy costs were 1.9% lower annually.

Core inflation, which strips out energy, food, alcohol and tobacco, was unchanged at 2.3%.

Irene Lauro, eurozone economist at Schroders, predicts the data will encourage the ECB to leave interest rates on hold this month:

With trade uncertainty easing, the Eurozone recovery is set to gain momentum as firms ramp up borrowing and investment. In this environment, the ECB is likely to hold rates cautiously steady in September.

The resilience in core inflation supports our view that policy normalisation has ended, and the ECB will closely monitor growth dynamics before making its next move.”

The key driver of weakness in the bond market could be a delayed reaction to Monday’s government reshuffle, suggests Kathleen Brooks, research director at brokerage XTB.

Brooks explains that investors may suspect the government could “throw away” its fiscal rules and borrow more at the Budget to fund spending, rather than increase taxes and stymie growth.

She explains:

The Prime Minister beefed up his economic team in the lead up to the budget. This has not gone down too well, with concerns that there is still a strategy void when it comes to the economy, as the government struggles to deliver the growth that it promised, at the same time as borrowing surges.

There could also be some concern that Chancellor Rachel Reeves is being ‘managed out’. The last time there was a threat to Reeves’ position, back in early July, bond yields jumped as the market worried that she could be replaced by a more left-leaning member of the Labour party.

Brooks also points out that the UK is not an outlier as European bond yields are also moving higher. As we flagged earlier, both French and German government borrowing costs are at their highest since the eurozone debt crisis.

France’s 30-year government bond yields have surged to their highest levels in over 16 years, as investors rush to sell French debt today.

The rise in yields is being driven by fiscal concerns, as prime minister François Bayrou began talks with political parties in a bid to prevent a government collapse ahead of next week’s confidence vote.

Bayrou warned on Sunday that France’s future was at stake in the September 8 confidence vote in parliament over his government’s plan to slash public spending.

Opposition parties have said they will oppose the austerity budget, though.

The jump in bond yields today indicates the Labour government could be losing credibility in the markets, suggests Neil Wilson, UK investor strategist at Saxo Markets.

Wilson explains that Keir Starmer’s reshuffle – including moving Darren Jones from the Treasury to Number 10 – could be a sign that the fiscal rules will be broken, saying:

Gilt yields in the UK rose after the prime minister reshuffled the deck, seemingly sidelining his iron chancellor Reeves by poaching her deputy. If the Treasury won’t break the rules, then perhaps Number 10 can?

The market move was a sign that investors do not have confidence the Treasury will stick to its strict borrowing rules. Long-dated gilt yields are now trading close to 27-year highs again with the 30yr above 5.68%. 30yr yields at their highest in almost three decades is not a good look for the Labour government, and underscores that there is little fiscal or economic credibility left.

There’s no respite for the UK in the bond markets, where debt prices continue to slip lower.

This has pushed the yield (interest rate) on Britain’s 30-year bonds up to 5.69% this morning, a fresh 27-year high.

The UK stock market has fallen into the red this morning, as equity markets across Europe slide.

The FTSE 100 index is down 40 points, or -0.43%, at 9156 points – falling away from the record high of 9,357 points set last month.

UK-focused stocks are leading the fallers, such as retailer Marks & Spencer (-3.6%), housebuilders Taylor Wimpey (-3.4%) and Barratt Redrow (-2.5%) and supermarket chain Sainsbury’s (-2.5%).

The selloff isn’t confined to London, though. Germany’s DAX index has fallen by 1%, while Spain’s IBEX and Italy’s FTSE MIB are both down 0.9%.

As well as bond market jitters, investors may also be fretting about the US trade war.

Overnight, Treasury secretary Scott Bessent has told Reuters that he is confident the Supreme Court will uphold Donald Trump’s tariffs, and overturn a ruling last week that they are illegal.

Bessent told Reuters that the White House has other options if Trump is blocked from using a 1977 emergency powers law to impose sweeping tariffs on most trading partners.

He cited Section 338 of the Smoot-Hawley Tariff Act of 1930, which allows the president to impose tariffs of up to 50% for five months against imports from countries that are found to discriminate against U.S. commerce.

The words '“Smoot-Hawley Tariff Act of 1930” could strike fear into investors – this protectionist legislation has been blamed for worsening the Great Depression of the 1930s.

The pound is sliding against the US dollar, on track for its worst day in almost three months.

Sterling, which is sensitive to shifts in sentiment towards the bond market, has fallen over 1% against the greenback.

It has lost almost 1.5 cents so far today, dropping to $1.34 – that would be its biggest one-day fall since mid-June.

The jump in UK bond yields today shows that Keir Starmer’s reshuffle of his Number 10 team has not reassured investors, says Mohit Kumar, chief economist at investment bank Jefferies International.

That reshuffle tooks to be Starmer’s attempt to take control of economic policy from the Treasury, with Darren Jones put in charge of day-to-day delivery and Minouche Shafik, the former Bank of England deputy governor, appointed the prime minister’s chief economic adviser.

Kumar told clients this morning:

Fiscal concerns are being felt in the UK as well with 30Y Gilts yields close to the highest level since 1998. The recent economic reshuffle in the government did little to ease investor concerns and is seen as undermining Chacellor Reeves.

Tax rises are inevitable, but we are reaching a stage where further tax rises could become counterproductive. So far the government has shied away from difficult decisions on spending cuts which would be required to bring the fiscal picture back in order. We remain negative on the UK long end and continue to favour steepeners along the curve.

Other governments are also being hit by rising borrowing costs today.

Germany’s 30-year yield has risen to a 14-year high, tracking a climb in U.S. Treasury yields, Reuters reports.

But at 3.399%, it is still much cheaper for Berlin to borrow for the next three decades than the UK.

Newsflash: British 30-year government bond yields have hit their highest since 1998, intensifying the pressure on the UK Treasury.

The 30-year gilt yield has risen to 5.680% in early trading, over the previous 27-year high set in April.

Yields measure the interest rate which an investor receives for holding a bond, and rise when the price of a bond falls.

This rise in bond yields adds to Rachel Reeves’s headache as she tries to draw up this autumn’s budget. Higher borrowing costs could create a larger black hole to be filled through higher taxes or spending cuts.

As covered in the introduction, long-term government borrowing costs have been pushed higher in recent weeks by worries over fiscal sustainability, and rising inflation.

Jim Reid of Deutsche Bank told clients this morning:

Even in orderly markets, we’re seeing a slow-moving vicious circle: rising debt concerns push yields higher, worsening debt dynamics, which in turn push yields higher again.

This is turning into a turbulent week for chief executives.

Last night, Nestlé dismissed its chief executive, Laurent Freixe, after an investigation into an “undisclosed romantic relationship” with a subordinate, in breach of its code of business conduct.

Now, Japanese drinks maker Suntory Holdings has announced that CEO and chairman Takeshi Niinami has resigned following a police investigation into his purchase of a potentially illegal supplement.

Niinami told the company he purchased the supplement believing that it was legal, Suntory said in a statement.

The Tokyo Shimbun newspaper had reported that police in Fukuoka prefecture have been conducting an investigation into whether supplements containing cannabis components had been sent to Niinami’s home in connection with a man who was arrested in July.

Suntory, one of the world’s largest drinks companies, produces a range of spirits including bourbons such as Jim Beam, Japanese whisky brands including Hakushu, Roku gin, plus tequila, vodka and rum brands.

Hedge fund billionaire Ray Dalio has warned that Donald Trump’s America is drifting into 1930s-style autocratic politics.

In an interview with the Financial Times, Dalio warned that “gaps in wealth”, “gaps in values” and a collapse in trust were driving “more extreme” policies in the US.

He cautioned:

“I think that what is happening now politically and socially is analogous to what happened around the world in the 1930-40 period.”

It’s rare (and welcome!) to hear a big Wall Street name criticise Trump – other leading investors have taken a more submissive approach to the president.

Dalio explained that other investors are too scared of the president to speak up, saying:

“I am just describing the cause and effect relationships that are driving what is happening. And by the way, during such times most people are silent because they are afraid of retaliation if they criticise.”

Dalio also criticised the US’s mounting national debt, warning that the country risks a “debt-induced heart attack in the relatively near future.”

Tokyo has fought off the bond vigilantes today, at a price!

An auction of Japan’s 10-year government bonds today has seen the strongest demand since October 2023.

Japan’s Ministry of Finance sold around 2.6 trillion yen (£13bn) of 10-year notes. Investors were attracted by elevated yield levels, with total bids nearly four times higher than the amount of debt on offer.

Bloomberg has more details;

The yield on the benchmark 10-year bond fell 2.5 basis points to 1.595% after touching 1.625% Monday, close to the highest since 2008, and bond futures gained after the auction result. The bid-to-cover ratio jumped to 3.92 from 3.06 at last month’s sale, comfortably above the 12-month average.

“The results were strong,” said Shuichi Ohsaki, a senior portfolio manager at Meiji Yasuda Asset Management’s fixed income management department.

“Given the high yield level at around 1.6% and the large-scale buying, bonds with maturities of 10 years or less are being bought, especially since the market had been cautious,” he said.

The gold has hit a new alltime high, as traders turn to precious metals as a safe-haven asset in inflationary times.

While government bond prices are falling (driving up yields), the spot price of gold has climbed over the $3,500 mark to hit $3,508.50 an ounce early this morning, with investors flocking to this traditional safe-haven asset.

The rally comes as the markets anticipate interest rate cuts in the US later this year, which has weakened the dollar.

Traders have been piling into gold-focused exchange traded funds (ETFs), which lifts demand for the precious metals, while some central banks have been adding to their own holdings.

Worries about inflation have also lifted demand for gold, as Tony Sycamore, IG analyst, explains:

This week’s rally in gold and silver began mid-morning yesterday and coincided with a social media post by US President Trump who claimed that prices in the USA are “WAY DOWN” with virtually no inflation.

However, this narrative contrasts with recent economic data showing persistent inflationary pressures remain and comes as President Trump continues his dovish reshaping of the Fed Board as he pushes for sooner and deeper Fed interest rate cuts, into an economy which is growing at ~3.5% in Q3 according to the latest Atlanta Fed GDP Now reading

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

The bond vigilantes are back, piling pressure on governments in London and Paris amid fears over fiscal sustainability.

The UK’s long-term cost of borrowing is on the verge of hitting its highest level since 1998. Yesterday the yield, or interest rate, on Britain’s 30-year debt rose as high as 5.646%, just a whisker from the 27-year high of 5.649% set during trading on 9th April.

That pushes up the cost of adding to Britain’s national debt, eating into the headroom available to chancellor Rachel Reeves as she draws up the autumn budget.

Bond vigilantes punish governments for what they consider to be bad policy choices, by shunning debt auctions or by demanding higher and higher rates of return before buying government bonds.

Fiscal concerns have been pushing up long-term borrowing costs globally in recent weeks; September is traditionally a tough month for the bond markets, so the next few weeks could be volatile.

UK debt is in the firing line due to fears that the economy will slow later this year, and that Reeves faces a budget black hole that will need to be filled through either tax rises or spending cuts.

As Deutsche Bank’s chief UK economist, Sanjay Raja, told clients:

At the risk of sounding a little dramatic, the Autumn Budget will be a defining moment for the UK. On our estimates, a fiscal hole worth GBP 20-25bn will need to be filled in November.

Kathleen Brooks of XTB says August was “dreadful” for UK bonds, explaining:

This summer’s drip feed of potential tax rises has not gone over well with voters, and Labour has been hemorrhaging support to Reform in recent weeks. Essentially voters don’t want tax rises, while Labour backbenchers don’t want spending cuts, but something will have to give.

Political turmoil in Paris has pushed France’s bond yields higher in recent weeks too, widening the gap with Germany. The French government could fall next week, if it loses a confidence vote called over unpopular spending cuts.

French 30-year bond yields hit a multi-year high of nearly 4.5% yesterday.

ING fear French bonds could continue to be pummelled by political uncertainty, telling clients:

The spread between French government bonds (OATs) and the German equivalent (Bunds) widened materially on the prospect of a confidence vote, and we still see the balance of risk tilted to further widening. The current 10Y spread is at a similar level to that seen in July 2024, when French President Emmanuel Macron called snap elections and OATs sold off significantly in response.

The agenda

• 10am Eurozone flash inflation reading for August

• 3pm BST: US manufacturing PMI report