Spotlight on gilts and why the spectre of stagflation is leading to financial turbulence
Spotlight on gilts and why the spectre of stagflation is leading to financial turbulence
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The cost of Government borrowing has surged in the last few days, which has knocked the pound and dealt a blow to Chancellor Rachel Reeves. UK Government bonds, referred to as gilts, have spiked to unprecedented levels not witnessed for years, raising concerns aboutl Government borrowing and the economic forecast. This escalation in gilt yields has sent the pound tumbling to its weakest position against the US dollar in over a year.
Market experts are drawing parallels between the current bond market meltdown and the turmoil following Liz Truss's "mini budget" in 2022. Here's an exploration into the turmoil with gilts and its implications for the Government:. What exactly are bonds and bond yields?.
Bonds represent loans given by investors to issuers, such as corporations or governments looking to raise funds. The yield on a bond signifies the return investors get from holding the debt, expressed as a percentage of the bond's price. When there's a drop in the bond's price, its yield goes up. Yields generally escalate when investor confidence in holding the debt reduces, leading them to pay less for these bonds.
Why are yields on bonds escalating?. The yields on long-duration 30-year gilts have climbed to their highest level since 1998, and yields on 10-year gilts have reached peaks not observed since the financial crisis of 2008. This climb is driven by apprehensions around Britain’s increased borrowing and the looming spectre of "stagflation" – a scenario where the economy grapples with soaring inflation and stagnant growth.
