UK borrowing costs rise on news that Reeves will change fiscal rules | Bonds

Borrowing costs for the UK government are rising in global financial markets on expectations that Chancellor Rachel Reeves will change the UK’s debt rules to free up up to £50bn of extra headroom for infrastructure investment.

Ahead of next week’s Budget, the Guardian revealed on Wednesday that the Prime Minister was preparing to confirm changes to the way debt rules are calculated at the International Monetary Fund’s annual meeting in Washington.

British government bond yields (real interest rates) rose about 6 basis points to over 4.2% in Thursday morning trading, before easing, in contrast to falling borrowing costs in other peer countries, including the United States. . The spread between German government bonds and German government bonds rose to the highest level in more than a year, according to Bloomberg.

“It appears to have something to do with Mr. Reeves, who last night suggested he could rewrite fiscal rules to increase infrastructure spending,” Lynne Graham Taylor, senior rates strategist at Rabobank, told Reuters.

Mr Reeves is not expected to reveal the exact details of the changes while in the US, but the Guardian has been told by senior government officials that he plans to target net financial debt in the public sector. .

The measure – broadly defined as government debt, which includes financial assets and liabilities – would have added £53bn of headroom within fiscal rules if it had been applied during the last budget in March.

Mr. Reeves is scheduled to attend Thursday’s IMF meeting. Using his visit to Washington to announce changes to fiscal rules shows that Mr. Reeves is aligned with traditionally conservative financial institutions, which have gradually declined in recent years to borrow for investments. We are moving in the direction of support.

Global bond yields have been under pressure in recent months on expectations that slowing inflation will prompt the world’s most powerful central banks to cut interest rates to avoid a hard landing for the economy.

UK inflation has fallen more than expected, even as Bank of England Governor Andrew Bailey warned there were still “open questions” about whether price pressures would remain robust. suggested.

Bailey told an IMF meeting that there was “good news” on inflation across advanced economies, in comments that seemed to hint that the central bank could further reduce borrowing costs at its next policy meeting in November. Ta.

“The elimination of inflation, which includes the UK, is actually happening faster than we expected,” he said.

Bailey told the Guardian earlier this month that the central bank could become “a bit more aggressive” in cutting interest rates if news on inflation remained positive. Financial markets expect interest rates to be cut from 5% to 4.75% on November 7th.

Private sector economic growth slowed more than expected in October, figures showed, amid uncertainty over the budget’s impact on businesses and consumers.

The S&P Global Flash UK Composite Purchasing Managers Index, one of the surveys that closely monitors business confidence, fell to an 11-month low of 51.7, down from 52.6 in September. For this index, 50 is the dividing line between growth and contraction.

Chris Williamson, chief business economist at S&P Global Market Intelligence, said: “Activity growth has fallen to its lowest level in nearly a year.”

“Companies are waiting for clarity on government policy. Conflicts in the Middle East and Ukraine, as well as the US election, have added to the uncertainty about the economic outlook.”

Separately, the CBI’s latest health check on the sector showed sentiment across the UK manufacturing sector fell at the fastest pace in two years in the quarter to October.

The CBI’s business confidence index fell to -24 from -9 in July, indicating that more companies are now pessimistic rather than optimistic about the outlook.