UK borrowing costs soar as stock prices fall as budget speculation rises

British government bond yields soared on Friday after reports that Chancellor of the Exchequer Rachel Reeves does not plan to raise income tax rates in her autumn budget later this month.

The yield on the benchmark 10-year Treasury note initially rose about 13 basis points in early trading, but ended up rising about 7 basis points to 4.51%. Yields on long-term 20-year and 30-year bonds last time rose by 8.5 basis points and 9 basis points, respectively. Yield and price are inversely proportional to each other.

The move came as investors reacted to a report in the Financial Times about an income tax U-turn. The Treasury Department was not immediately available for comment when contacted by CNBC on Friday morning.

British stocks also fell. of FTSE100 The index fell more than 1% in morning trading. Lloyd’sNatWest, and barclays The banks at the bottom of the index each fell more than 2.7%.

Over the past week, Mr Reeves has been laying the groundwork for an income tax rise that clearly violates his manifesto, dividing Labor MPs and causing further turmoil in an already crowded party whose leader, Prime Minister Keir Starmer, has dismal approval ratings.

The proposed 2p national income increase was to be offset by a 2p cut in national insurance, aimed at hitting passive income sources rather than working people. But there are now hopes that the £30 billion ($39.5 billion) hole in the government’s budget will be filled with a patchwork of smaller increases.

This could be a “financial calculation” as a patchwork approach would put pressure on the gold market, Len Sterling investment director Rory McPherson told CNBC’s “Squawk Box Europe” on Friday.

“I think if more small taxes are targeted within the UK as part of Rachel Reeves’ policy, there will be more pressure on the government to go back into the bond market for more money, and that will put even more pressure on yields,” Mr McPherson said.

He added that yields have been “significantly lower” but are now “recovering.”

This year’s volatility has pushed long-term borrowing costs to their highest level since the late 1990s, making UK government bonds the most expensive in the G7.

For Toni Meadows, investment director at BRI Wealth Management, the government is “in a tough spot with this budget”.

“They inherited a bad fiscal situation, but they made it even worse with public sector pay incentives. There is more speculation about this budget than any statement in recent history because everything they set out to do will be unpopular. How can this statement simultaneously stimulate growth while having to cut spending and increase tax burdens to satisfy bond investors?” He noted that outstanding debt and service costs were adding to the pressure.

Although markets are pessimistic, “the uncertainty of not knowing the exact details is more damaging in the short term,” Meadows said, adding that detailed planning is needed for investors to move beyond speculation.

Julian Howard, chief multi-asset investment strategist at GAM Investments, suggested “onerous restrictions” on pension savings, ISAs, out-of-country expenses, capital gains and council tax changes could be considered.

He said: “The Chancellor will no doubt deliver enough misery later this month to resolve the immediate problems, but the new challenges the market is hinting at may now become one of more general economic confidence issues.”

Wren Sterling’s MacPherson added that the Bank of England could still cut interest rates after the Budget if it wanted. Other investors also appeared to have tempered their optimism, with bets on rate cuts falling by 6 basis points compared to Thursday, according to data compiled by LSEG.

The autumn budget is scheduled to be announced on November 26th.

—CNBC’s Chloe Taylor and Sam Meredith contributed to this report.