The British government is trying to calm bond market jitters after soaring borrowing costs

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The British government tried to contain the turmoil in Britain’s bond markets on Thursday by promising to stick to its fiscal rules as borrowing costs hit their highest level since the financial crisis.

Darren Jones, the UK’s number two Treasury chief, told MPs that “UK gilt markets will continue to function properly after the ten-year term has expired.” gold plated The yield rose to 4.93 percent, the highest since 2008, and the pound fell as much as 1 percent against the dollar to its lowest level in more than a year.

“There should be no doubt about the government’s commitment to economic stability and sound public finances,” Jones said. “Therefore, compliance with the budget rules is non-negotiable.”

Jones’ appearance came after House of Commons Speaker Sir Lindsay Hoyle took an urgent question from the Conservative opposition on “growing borrowing cost pressures on the public finances”.

Chancellor Rachel Reeves, about to embark on a long-planned trip to China, sent Jones, the Treasury’s chief secretary, to respond.

The 10-year Treasury yield rose as much as 0.12 percentage points before Treasury bonds rallied and the yield remained only slightly higher on the day at 4.81 percent. Yields move in the opposite direction to prices.

Sterling was dragged down by the sell-off, falling to $1.224, its weakest since November 2023, before staging a partial recovery at $1.229.

“The sell-off in the pound and U.K. government bonds reflects a deterioration in the U.K.’s fiscal outlook,” said analysts at Brown Brothers Harriman.

Borrowing costs in the UK have risen sharply as investors worry about the government’s high borrowing needs and the growing threat of stagflation, which combines weak growth with persistent price pressures.

Jones argued that it was normal for government bond prices to fluctuate and that there remained strong demand for UK government bonds.

“At the last auction yesterday there were three times as many bids as were offered,” he said.

The minister said the Treasury was still working on a multi-year spending review due this summer based on the assumptions set out in the October Budget.

However, he acknowledged that the Office for Budget Responsibility, the independent budget watchdog, would present new forecasts on March 26, which could then impact discussions with ministers.

Recent tensions in the bond market also raise the specter of tax increases or spending cuts. The Treasury has signaled it would cut spending if necessary rather than raise taxes.

Shadow Chancellor Mel Stride, who asked the urgent question, said Reeves should have attended Parliament himself.

“Where is the Chancellor?” he asked. “It is a bitter regret that she is nowhere to be seen, even at this difficult time with these serious problems.”

He later called on Reeves to cancel her trip to China and focus on that country instead, while attacking Labour’s “panicked attempt to reassure markets about the economic chaos of their own making”.

Reeves left herself a narrow £9.9bn of wiggle room against her revised fiscal rules in last year’s autumn budget, even after announcing a £40bn tax rise package aimed at “cleaning up” the public finances.

The Chancellor’s most important budget rule is the promise to finance all current public spending from tax revenues by 2029/30.

Since then, rising government debt yields have threatened this fiscal space. The level of bond yields is an important factor in budgetary flexibility as it impacts the government’s interest bill, which amounts to over £100 billion a year.

“Investors are looking for some kind of guidance from someone, but the government has just said there is no problem,” said Tomasz Wieladek, chief Europe economist at T Rowe Price. “The Bank of England will hold out as long as possible,” he added, saying the moves were not big enough to merit more than a verbal response from policymakers.

The U.K. government bond market could suffer another wave of selling on Friday, analysts said, if closely watched U.S. jobs data push U.S. Treasury yields higher, dragging down Treasury bonds with them.

“Things can get extremely bleak for gilts if we see a strong payroll,” said Pooja Kumra, UK rates strategist at TD Securities.

Analysts say the simultaneous selloff in U.K. government bonds and the pound echoes the reaction triggered by Liz Truss’ 2022 “mini” budget.

However, many investors believe that the situation has not yet reached the UK government bond crisis in 2022.

“I assume that the bottom will have been reached. . . There was already a washout in government bonds last year,” said Geoffrey Yu, a senior strategist at BNY. “I don’t deny that there are problems in the UK, but suddenly drawing comparisons to 2022 I think is over the top.”