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Government borrowing costs hit 11-year high

Government borrowing costs hit an 11-year high as Liz Truss outlines her £150bn plan to cover the country’s energy bills

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Government borrowing costs hit an 11-year high yesterday as Prime Minister Liz Truss unveiled a ceiling on energy bills that could cost up to £150 billion.

As financial markets reacted to the prospect of more debt to fund the emergency package, 10-year government bond yields rose to 3.156 percent.

That was the highest level since July 2011, effectively demonstrating that investors are demanding higher yields on government loans.

Government debt: As financial markets reacted to the prospect of more debt to fund the emergency package, 10-year government bond yields rose to 3,156%

Government debt: As financial markets reacted to the prospect of more debt to fund the emergency package, 10-year government bond yields rose to 3,156%

The government issues packages of debt known as bonds, or gilts, to raise money for expenses not covered by the tax.

The latest rise in yields – or interest rates the government pays to lenders buying the bonds – followed the market turbulence over the summer.

In August, 10-year bond yields saw their largest single-month rise since 1994.

Yields on 20- and 30-year bonds also rose yesterday, reaching their highest level since 2014.

An important factor is the outlook for inflation. The policy of curbing the rise in energy prices will lead to lower inflation in the coming months than previously thought.

But leaving more money in consumers’ pockets could fuel inflation going forward.

That could persuade the Bank of England to raise interest rates further to try to keep prices in check. Higher interest rates mean bond investors demand higher returns.

NatWest Markets raised its Bank of England rate forecast to 3.5 percent early next year and raised its 10-year yield target to 4 percent.

Ross Walker, a NatWest economist, said he was surprised yields hadn’t increased more dramatically.

“The widely reported £150 billion in additional loans over the next two years is a substantial increase,” he said. ‘That will cause financing problems.’ Higher yields add billions to debt interest payments.

The bond sell-off alone last month is expected to add £6bn to the deficit in 2026-27.

Those debt interest payments are already rising because some bonds are linked to inflation.

A recent forecast predicted they would reach £118 billion in the current fiscal year.

The pound is also sliding amid recent uncertainty over government policy.

Sterling hit a 37-year low against the US dollar this week, just above $1.14. After the announcement of Truss’s energy policy, it immediately rose above $1.16, but later fell back to $1.15.

Paul Dales, UK chief economist at Capital Economics, said: “In general, the financial markets have adapted in recent days to a combination of looser fiscal policy and tighter monetary policy.

We are not convinced that 10-year Treasury yields will rise much further, but we do believe that the pound will weaken from $1.15 now to $1.05 next year.”

It is not only bonds in the UK that have come under pressure.

The German two-year yield rose yesterday to its highest level since 2011 after the European Central Bank’s unprecedented rate hike of 0.75 percentage point.

German 10-year bonds also rose in response to the ECB’s commitment to continue raising interest rates over the next few meetings.

£40 billion to boost energy companies

The Treasury and the Bank of England have launched a £40 billion plan to help energy companies maintain their finances amid rising wholesale prices.

The companies often sell electricity in advance, but must maintain a ‘minimum margin’ to protect themselves against price fluctuations. Those costs have risen as prices have risen, causing businesses across Europe to struggle.

Prime Minister Liz Truss said the £40bn settlement “will ensure companies have the liquidity they need to manage price volatility”.

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