(Bloomberg) -- The UK paid the most in decades to sell 30-year inflation-linked debt after a punishing selloff that’s seen investors dump British stocks, bonds and the pound.
Most Read from Bloomberg
The interest rate of 2.126% the government must pay on top of inflation for the £1 billion ($1.2 billion) of bonds sold at auction on Tuesday was the highest in data going back to 2006. The last time the so-called real yield for 30-year debt was consistently around this level was more than two decades ago.
UK assets have been hit hardest among developed economies in the recent global bond slide with concern about government finances and sticky inflation mounting. Yields have climbed to the highest levels in decades, while the pound is near its weakest in over a year.
It’s unfortunate timing for the Labour government as it seeks to borrow near-record sums this fiscal year and make good on its manifesto pledges against a darkening market mood. The rise in borrowing costs is eating into the little fiscal wiggle room Chancellor Rachel Reeves’ has left in her budget.
“They are stuck between a rock and a hard place,” said Craig Inches, head of rates and cash at Royal London Asset Management. “They can’t afford yields to go any higher, thus the most likely outcome is a UK recession.”
The yield on the notes sold Tuesday was poised to snap a six-day advance after the auction, falling three basis points to 2.13% as markets more broadly took a breather from the selloff.
The rate is still up more than half a percentage point since the last sale by syndication in November, with the yield closing above 2% for the first time since 2003 last week. Tuesday’s auction was oversubscribed 3.06 times as the historically high compensation attracted investors.
Reeves Speaks
There won’t be any let-up in the sales. Tuesday’s offering will be followed by a £4 billion auction of 10-year notes on Wednesday. Next week will see a sale of three-year debt as well as an offering through banks of bonds maturing in 2040.
And the final week of January will conclude with sales of 10-year inflation-linked securities, green debt and a Bank of England operation to sell long-maturity bonds from its holdings purchased during the era of quantitative easing.
Reeves will speak to lawmakers later Tuesday for the first time since last week’s turmoil. Traders will be watching for any pointers on how she plans to rebuild fiscal headroom, with Bloomberg Economics estimating that she needs to find as much £12 billion.