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Bank to step up fight against inflation: Government borrowing costs rise as traders bet on aggressive rate hikes and higher government spending
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The cost of government borrowing rose as traders bet on aggressive rate hikes and higher government spending.
Two-year Treasury yields — essentially the rate investors charge to lend to the government — climbed to levels not seen since 2008, at 3.35 percent.
These short-term bonds are more sensitive to rises in the Bank of England’s key interest rate, and yesterday’s jump indicated investors expect Threadneedle Street to continue massive rate hikes this week.
Borrowing costs: Short-term government bonds are more sensitive to increases in the Bank of England’s key interest rate
The Bank has been raising interest rates since December in a battle to tame scalding inflation. Investors now expect a massive 0.75 percentage point rise to 2.5 percent tomorrow in what would be the biggest move in 33 years.
As a sign that traders expect the drastic move to continue, they are counting on interest at 3.75% by Christmas.
While such a move could help curb inflation, encouraging savings rather than spending, it would increase the debt burden for mortgage holders and other borrowers.
Ten-year UK government bonds also hit their highest level since 2011 – rising to 3.32 percent – when Liz Truss called for tax cuts in a mini-budget on Friday.
With help on energy bills also on the horizon, it looks like government borrowing will soar.
The more the government has to borrow through gilts, the more investors will ask to receive returns.
Pressure on bond markets comes as the US Federal Reserve is due to announce its own rate decision today.
The Fed has been aggressive in its fight against inflation and is expected to announce another 0.75 percentage point hike.
But this has pressured other countries to keep pace as investors flock to the dollar.