Britain is being “slowly Truss’d” as surging government borrowing costs erode the Chancellor’s fiscal room for manoeuvre ahead of October’s Budget, according to the chief executive of one of the world’s largest independent financial advisory organisations.
Nigel Green, chief executive of deVere Group, said the UK bond market was undergoing a drawn-out version of the turmoil that engulfed Liz Truss’s government after its 2022 mini-Budget.
His warning comes as the 10-year gilt yield stands at about 5.25 per cent, its highest level since 2008. The 30-year yield reached 5.89 per cent earlier this month, a level not seen since 1998.
Both yields are above the peaks that prompted emergency central bank intervention during the 2022 market turmoil.
“The bond market is doing to the UK’s finances, in slow motion, what it did during the 2022 mini-budget meltdown, and Chancellor John Healey walks into his first Budget on 28 October with a far weaker hand than the official forecasts suggest,” says Nigel Green.
“Everyone remembers the Truss moment because it happened in a week. This one’s happening in slow motion, and the damage could end up bigger.
“Borrowing costs are already higher than when the bond market went mad in 2022. There’s just no single day, no single decision, to point at.”
The rise in yields has helped cut estimated fiscal headroom from about £26bn to £13.8bn, according to the figures cited by Green, leaving the Chancellor with significantly less room to absorb further deterioration before the Budget.
“The Chancellor’s already lost almost half his headroom and he hasn’t stood up at the despatch box yet for the Budget,” says Nigel Green.
“The market’s writing the first draft of this Budget. Every basis point makes the arithmetic harder, and every tax rise or spending restraint gets judged against a bond market that’s already moved.”
The challenge differs from the Truss episode, when a sharp market reaction was followed by a policy reversal and a change of chancellor. A gradual repricing of government debt offers no comparable single exit.
The Bank of England has indicated it will stop selling very long-dated gilts under quantitative tightening, highlighting pressure at the longer end of the curve — the same part of the market that came under severe strain in 2022 when pension funds became forced sellers.
Traditional buyers of long-dated government debt are also becoming less prominent while the government continues to face substantial borrowing requirements.
“In 2022 the fix was a U-turn and a new face at the Treasury. There’s no equivalent here,” says the deVere CEO.
“You can’t reverse a trend. The old reliable buyers of long-dated debt are fading, the supply keeps coming, and global bond markets are already jittery. It’s a combustible mix.”
Global factors are also pushing borrowing costs higher, including inflation concerns, elevated oil prices and tighter monetary policy in Japan and the US.
But with Bank Rate at 3.75 per cent and the Budget looming, the UK remains exposed to shifts in global bond-market sentiment.
“The pain won’t stay in Whitehall. Higher gilt yields feed into mortgage pricing, corporate borrowing costs and pension valuations, spreading the strain across households and businesses.
“Global bond markets are setting the tone, but the UK’s got its own vulnerabilities and 28 October is where they get tested,” says Nigel Green.
“If the Budget doesn’t convince bond investors the numbers add up, the drip becomes a flood. Doubt is all it takes for gilts to misbehave, and bond vigilantes to come roaring back.”
The Truss episode demonstrated how quickly confidence can deteriorate when investors lose faith in the government’s fiscal calculations. The challenge for Healey will be to convince bond investors that the UK’s debt dynamics remain credible before market pressure intensifies.
Questions over the Budget therefore extend beyond the scale of any tax rises or spending restraint. Investors will be watching how much consolidation is delivered, whether the government’s fiscal rules remain credible and whether the Chancellor can rebuild headroom without putting further pressure on economic growth.
“The bond market will judge whether there’s credibility and the sums work at the Budget, and right now it’s casting a very sceptical eye over them,” concludes Nigel Green.