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Gilt yields suggest trouble ahead for the pound

The Bank of England will need to pick up the pieces after the impending recession. Credit: Getty

July 19, 2023 - 6:00pm

Recent reports suggest that gilts, or British Government bonds, are becoming increasingly hard to sell. The main reason for this is that investors see British inflation as much more stubborn than elsewhere in the world, and so expect that the Bank of England will have to raise interest rates higher, therefore making holding gilts more risky.

British Government bond yields are now substantially higher than yields on American equivalents, and far higher than European yields. One hedge fund manager recently told me that traders are comparing the gilt market to a government bond market in a developing country.

These developments could not have come at a worse time. The Government is preparing to sell £241 billion worth of gilts in the current fiscal year, over £100 billion more than it issued last year. If these reports are accurate, the Government’s fiscal deficit — or “public sector borrowing requirement” (PSBR) — will be far higher than currently being projected.

The Office for Budget Responsibility (OBR), which independently forecasts the economy and public borrowing, puts the PSBR at around 5.1% of GDP in 2022-23. But if we take the £241 billion worth of bonds reportedly issued this fiscal year and plug in the OBR’s own growth and inflation projections, we get a PSBR of around 8.6% of GDP. This is an unprecedented level of public borrowing outside a recession.

Things look even worse when factoring in the possibility of a recession. House prices are currently contracting, with data from property-listing websites like Rightmove showing a decline in asking prices. This raises the possibility that we get a repeat of the 2008-09 recession, which was the last time the property market sagged to this extent and when layoffs started in the construction sector.

Taking the reported ÂŁ241 billion number and then modelling a recession driven by a burst property bubble shows that public borrowing tops out at an eye-watering 13.1-15.8%. While there were similar levels of borrowing during 2020 because of the lockdown, this was generally attributed to exceptional circumstances. Yet these numbers suggest that the borrowing in 2020 could easily be repeated in the near future without the need for lockdowns.

What does this mean for the British economy? Unlike in other developed countries, Britain’s currency is very sensitive to fluctuations in capital movements. If the economy were to enter a recession and the Government forced to sell huge amounts of gilts in a market that is not particularly keen to buy them, sterling could well fall in value. 

Indeed, the last recession instigated a decline in currency, with sterling falling by around 20% against the US dollar and never really recovering. A fall in sterling would mean an increase in import prices, and since approximately one in three goods consumed in Britain is imported, this would mean more inflationary pressure. Hard times lie ahead for the UK’s economy.


Philip Pilkington is a macroeconomist and investment professional, and the author of The Reformation in Economics

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Ian McKinney
Ian McKinney
11 months ago

Once again the bottom line is that we don’t make enough of our own stuff.

Fall in sterling would be great if we were exporters.

Industrial strategy, now.

Billy Bob
Billy Bob
11 months ago
Reply to  Ian McKinney

Don’t be silly. Just leave everything to the market, it always knows best apparently

Nicky Samengo-Turner
Nicky Samengo-Turner
11 months ago
Reply to  Billy Bob

who knows better?

Nicky Samengo-Turner
Nicky Samengo-Turner
11 months ago
Reply to  Billy Bob

who knows better?

Nicky Samengo-Turner
Nicky Samengo-Turner
11 months ago
Reply to  Ian McKinney

Revenue from services is the same inwards ÂŁ as revenue from goods.. with lower cost and higher ROE and ROCE… a common misunderstanding of basic economics….

Billy Bob
Billy Bob
11 months ago
Reply to  Ian McKinney

Don’t be silly. Just leave everything to the market, it always knows best apparently

Nicky Samengo-Turner
Nicky Samengo-Turner
11 months ago
Reply to  Ian McKinney

Revenue from services is the same inwards ÂŁ as revenue from goods.. with lower cost and higher ROE and ROCE… a common misunderstanding of basic economics….

Ian McKinney
Ian McKinney
11 months ago

Once again the bottom line is that we don’t make enough of our own stuff.

Fall in sterling would be great if we were exporters.

Industrial strategy, now.

Right-Wing Hippie
Right-Wing Hippie
11 months ago

This raises the possibility that we get a repeat of the 2008-09 recession
A repeat of the 2008-9 recession looks increasingly like a best-case scenario.

Right-Wing Hippie
Right-Wing Hippie
11 months ago

This raises the possibility that we get a repeat of the 2008-09 recession
A repeat of the 2008-9 recession looks increasingly like a best-case scenario.

Susan Grabston
Susan Grabston
11 months ago

I think I’m turning Japanese, I really think so. Except we don’t have their ace csrd – surplus balance of trade. There was sleight of hand when BofE purchased gilts in 2020. Expect more of same. Not a uniquely British problem. With incoming Japanese Bank Governor signalling a new direction, bond sales challenging – even Janet Yellen sent to China to do her bit.

Susan Grabston
Susan Grabston
11 months ago

I think I’m turning Japanese, I really think so. Except we don’t have their ace csrd – surplus balance of trade. There was sleight of hand when BofE purchased gilts in 2020. Expect more of same. Not a uniquely British problem. With incoming Japanese Bank Governor signalling a new direction, bond sales challenging – even Janet Yellen sent to China to do her bit.

Tony Buck
Tony Buck
11 months ago

Perfect storm ?

Tony Buck
Tony Buck
11 months ago

Perfect storm ?

Nicky Samengo-Turner
Nicky Samengo-Turner
11 months ago

at last.. informed comment on Unherd about capital markets!
Britain does not, as many other countries, have a retail sales mechanism for gilts, which would ensure more debt retained in UK, one of Italy’s long standing strengths. The BoE and Treasury/DMO have refused various proposals to implement such a strategy, to ” protect banks deposits (sic.)

Britain could also move long term infrastructure funding into a quasi long dated (?30 yr +) hybrid ” guaranteed in default only” debt structure that would be heavily supported by our life and pensions institutions, but again BoE, Treasury and DMO have refused such initiatives, despite interest from long term actuarily based investor institutions.

Nicky Samengo-Turner
Nicky Samengo-Turner
11 months ago

at last.. informed comment on Unherd about capital markets!
Britain does not, as many other countries, have a retail sales mechanism for gilts, which would ensure more debt retained in UK, one of Italy’s long standing strengths. The BoE and Treasury/DMO have refused various proposals to implement such a strategy, to ” protect banks deposits (sic.)

Britain could also move long term infrastructure funding into a quasi long dated (?30 yr +) hybrid ” guaranteed in default only” debt structure that would be heavily supported by our life and pensions institutions, but again BoE, Treasury and DMO have refused such initiatives, despite interest from long term actuarily based investor institutions.

Michael James
Michael James
11 months ago

We should welcome these signs of imminent bankruptcy and financial crisis. They’re the only restraint left on profligate government spending, and already forcing Starmer to lower voter expectations.

Michael James
Michael James
11 months ago

We should welcome these signs of imminent bankruptcy and financial crisis. They’re the only restraint left on profligate government spending, and already forcing Starmer to lower voter expectations.

Christopher Barclay
Christopher Barclay
11 months ago

High interest rates and gilt yields will attract foreign investors while there is the facade of ‘adults’ aka ‘globalists’ being in control of UK finances and the pound will stay stable. The situation however could turn quickly as it did under Truss. This is why Starmer is purging the Labour Left. He knows that spending increases that are not matched by tax increases will cause ÂŁ to fall faster and further than anyone thins possible.

Christopher Barclay
Christopher Barclay
11 months ago

High interest rates and gilt yields will attract foreign investors while there is the facade of ‘adults’ aka ‘globalists’ being in control of UK finances and the pound will stay stable. The situation however could turn quickly as it did under Truss. This is why Starmer is purging the Labour Left. He knows that spending increases that are not matched by tax increases will cause ÂŁ to fall faster and further than anyone thins possible.

Ethniciodo Rodenydo
Ethniciodo Rodenydo
11 months ago

we’re all doomed

Ethniciodo Rodenydo
Ethniciodo Rodenydo
11 months ago

we’re all doomed

Jim Veenbaas
Jim Veenbaas
11 months ago

Test