5%... UK Bonds Fallen to Italy and Greece Levels, the 'Sick Man of Europe'

20- and 30-Year Government Bond Yields Reach Highest Intraday Level in 20 Years
Prime Minister Truss Sticks to Tax Cut Plan... Raises UK Debt Concerns

[Asia Economy Reporter Park Byung-hee] Concerns over UK government debt persist, and extreme volatility in the UK government bond market is exacerbating instability in the international financial markets.

According to major foreign media on the 12th (local time), the yields on UK 20-year and 30-year government bonds surpassed 5% during the day, soaring to the highest levels in 20 years. This is interpreted as reflecting fears that the UK government could face a long-term fiscal crisis.

The 30-year government bond yield rose to an intraday high of 5.1%, and the 20-year bond reached a peak of 5.2%. However, gains narrowed significantly in the latter part of the session, closing at 4.81% for the 30-year and 4.91% for the 20-year bonds. Based on closing prices, the 30-year bond yield increased by 0.02 percentage points compared to the previous day, while the 20-year bond remained flat. The decline in UK government bond yields in the late session was reportedly due to the Bank of England (BOE), the central bank, conducting its largest bond purchase since intervening in the market on the 28th of last month.

The benchmark 10-year government bond yield remains around 4% alongside Greece and Italy, which have the highest debt ratios within the Eurozone.

On the day, the UK 10-year government bond yield closed at 4.42%, down 0.02 percentage points from the previous day, but it rose intraday to 4.64%, marking the highest level since 2008. The closing yields for Greece and Italy’s 10-year government bonds were 4.96% and 4.80%, respectively.

Greece and Italy’s government debt ratios exceed 150%, which is significantly higher than the UK's government debt ratio in the 80% range. However, the UK government bond market is shaking due to concerns that the large-scale tax cut plan by the new Liz Truss administration could significantly increase government debt.

On the day before the Truss government announced the ?43 billion tax cut plan, on the 22nd of last month, the UK 10-year government bond yield was 3.5%. About 20 days after the large-scale tax cut announcement, the 10-year bond yield rose by approximately 1 percentage point.

The BOE intervened in the bond market by announcing a ?65 billion bond purchase plan on the 28th of last month, just five days after the government’s tax cut plan was announced. At that time, the BOE set the bond purchase deadline as October 14, but institutional investors such as pension funds and life insurance companies requested an extension. However, BOE Governor Andrew Bailey dismissed the extension requests, and instability in the bond market continued. He declared the day before that "bond purchases will end as scheduled on the 14th."

Liz Truss, Prime Minister of the United Kingdom [Photo by AFP Yonhap News]

On the same day, Prime Minister Truss’s appearance in the House of Commons, emphasizing that the government would not reduce fiscal spending plans, also negatively affected the bond market. Truss fueled concerns about a fiscal crisis by insisting that government spending would not be cut despite expectations that government revenue would decrease due to the large-scale tax cuts.

Truss has already withdrawn the plan to reduce the top income tax rate from 45% to 40%, which was a key policy in the tax cut plan. As a result, the government can offset about ?2 billion in lost revenue, and the originally announced ?45 billion tax cut plan has been adjusted to ?43 billion.

Labour Party leader Keir Starmer argued during a Q&A session with Truss that the entire ?43 billion tax cut plan should be withdrawn. There were also calls within the Conservative Party to revise the tax cut plan.

However, Truss emphasized that government debt would be reduced not by cutting public spending but by using public funds efficiently. She stressed that the tax cut plan would ultimately increase the UK’s economic growth rate and that government debt would decrease in the medium term.

This content was produced with the assistance of AI translation services.