The British pound (GBP) dropped to its weakest level since late 2023 on Thursday, driven by a global bond market selloff. This has driven the UK government’s borrowing costs to their highest in over 16 years, reigniting concerns about the nation’s fiscal stability.
Sterling Hits a New Low
Sterling dropped 0.5% to $1.2305, after plunging as much as 1.6% earlier—its lowest since November 2023. Concurrently, the cost of hedging against significant price swings in the pound over the next month surged to levels not seen since the March 2023 banking crisis.
The pressure stems from global bond yields, which have soared due to concerns about rising inflation, reduced likelihood of interest rate cuts, and uncertainty surrounding U.S. President-elect Donald Trump’s economic and foreign policies. The potential addition of trillions of dollars in U.S. debt has only amplified these concerns.
UK Gilt Market Takes a Hit
The UK bond market has faced significant strain, with benchmark 10-year gilt yields spiking by a quarter-point this week to their highest levels since 2008. By Thursday afternoon in London, the selling pressure had eased slightly, leaving yields unchanged at around 4.81%.
Chancellor of the Exchequer Rachel Reeves now faces a critical test. The bond market turmoil may compel her to make tough decisions on future government spending. Although higher gilt yields usually boost the pound, this trend has reversed as concerns grow over the UK’s financial stability.
“This is the bond market starting to discipline the UK government,” said Lloyd Harris, head of fixed income at Premier Miton Investors. “At the moment, they want to fight the market, and that never ends well.”
Slower Growth and Persistent Inflation
Despite its recent struggles, the pound has been one of the best-performing currencies against the U.S. dollar in recent years. This is largely due to the Bank of England’s policy of maintaining higher interest rates than other major central banks, attracting foreign investors to UK assets.
However, Britain faces slower economic growth, persistent inflation, and a deteriorating labor market. These challenges have left the UK lagging behind the United States, which continues to show resilience across various economic indicators.
Trump’s proposed trade tariffs and immigration policies could drive up U.S. inflation, restricting the Federal Reserve’s ability to lower rates. This has driven the dollar higher against most global currencies, including the pound.
Bond Market Comparisons
The yield on 30-year UK gilts reached 5.3% this week—its highest since 1998—mirroring a rise in global long-term yields. The situation has drawn comparisons to September 2022, when then-Prime Minister Liz Truss’s unfunded tax cuts sent gilts into freefall, battered the pound, and forced the Bank of England to stabilize the market. However, this week’s movements remain far less dramatic.
Notably, PIMCO, one of the world’s largest bond investors, remains optimistic about UK debt. The firm attributes much of the gilt yield increase to rising U.S. Treasury yields rather than domestic financial instability.
Looking Ahead
As the pound navigates this turbulent period, the UK government’s fiscal policies and the global economic environment will play critical roles in determining its trajectory. Investors and policymakers alike will need to monitor these developments closely as Britain grapples with economic challenges on multiple fronts.
“This is the bond market starting to discipline the UK government,” said Lloyd Harris, head of fixed income at Premier Miton Investors. “At the moment, they want to fight the market, and that never ends well.”