Surge in UK borrowing costs is not a repeat of the 'mini-budget' crisis, economists say

LONDON — U.K. borrowing costs are elevated after the Labour government unveiled a huge package of borrowing and tax rises in its Wednesday budget — but analysts downplayed the possibility of a second "mini-budget" crisis in the British bond market.

The 10-year gilt yield, representing medium-term borrowing costs for the government, was slightly lower on the day at 2:45 p.m. London time Friday. However, it was still above 4.4%, up from around 4.3% ahead of Wednesday's budget. The 2-year gilt yield had risen from around 4.2% on Wednesday to 4.414% in the Friday session.

Yields move inversely to prices, so higher yields represent a sell-off in bonds — and an aversion to funding U.K. debt.

Along with around £40 billion in tax hikes, Finance Minister Rachel Reeves on Wednesday announced a significantly higher increase in short-term borrowing than many economists had expected. Reeves said the moves were necessary to transition the budget toward a day-to-day spending balance while investing in public services and infrastructure. Many of her plans reached the public in advance, bracing markets for impact.

But traders remain on-edge given the U.K.'s recent history with volatile bond movements, even though many macro conditions — most notably the significant cooling of inflation — are now different. Former Prime Minister Liz Truss was widely criticized in autumn 2022 for causing havoc in markets by announcing a huge increase in borrowing to fund tax cuts without any prior warning. The incident sent bond yields soaring so rapidly that they threatened to destabilize pension funds.

In notes analyzing this week's budget, some economists have suggested that the scale of fiscal expansion announced by Reeves will lead to slightly higher