Surging UK Bond Yields Test Fiscal Limits Amid US Tariff Impact

British 30-year government bond yields reached their highest levels since 1998, influenced by a substantial increase in U.S. Treasury yields after significant U.S. tariffs on China. Concerns mount over the UK's fiscal space and potential rate cuts, amidst volatile financial markets and investor demand.

British 30-year government bond yields soared to a peak not seen since July 1998. The sudden climb was spurred by an overnight rise in U.S. Treasury yields, driven by President Donald Trump's implementation of substantial tariffs on China. At 0713 GMT, the 30-year British gilt yield ascended to 5.507%, surpassing its previous multi-decade high charted in January.

Earlier in the week, these yields experienced a nearly unprecedented 19 basis point spike, the largest since October 2022, following former Prime Minister Liz Truss' unsuccessful "mini-budget". Meanwhile, ten-year gilt yields increased by 7 basis points to 4.68%, while two-year yields declined to 3.93% as investors anticipated quicker Bank of England rate cuts.

The disparity between two-year and 30-year gilt yields expanded to 163 basis points, its maximum since May 2017. Interest rate futures indicate anticipated rate cuts by the Bank of England, with an 85 basis point reduction expected this year, as market watchers adjust to the changing fiscal landscape influenced by U.S. tariffs and domestic factors.

(With inputs from agencies.)