The UK's financial “black hole” frightens the market! 30-year treasury bonds were sold off, and the pound recorded its biggest one-day decline since June 17

The Zhitong Finance App learned that due to growing investors' concerns about the sustainability of the UK's public finances, the yield on British 30-year treasury bonds rose to its highest level since 1998 on Tuesday, and the pound fell more than 1%, the biggest one-day decline since June 17. According to data, the yield on British 30-year treasury bonds rose 5 basis points on Tuesday, hitting a high of 5.69%, the highest level since 5 yuan in 1998. Meanwhile, GBP/USD fell 1.2% to 1.33; GBP/EUR fell 0.7% to 86.98 pence per euro.

The weak performance of British treasury bonds comes at a time when major bond markets are generally being sold off, and the market focus is once again shifting to rising debt levels. The sharp fall in the pound was even more remarkable, underscoring the fragility of the British market, as market concerns about the UK government's ability to impose fiscal restraints were growing.

According to the UK government's own predictions, fiscal spending is expected to account for 60% of GDP, compared to just 53% during the pandemic. At the same time, revenue as a percentage of GDP will fall slightly, to less than 40%. As a result, the UK is about to face huge national debt — by 2073, the UK's debt will reach 274% of GDP, which means that the deficit will reach 21% of GDP; interest on this debt alone is equivalent to about 13% of GDP.

Nick Kennedy, forex strategist at Lloyds Bank, said: “The UK's fiscal background has always been very dangerous, and this will continue.” “The interest rate market has taken into account a certain risk premium this summer. Now, investors are also demanding a higher risk premium in the pound.”

Jane Foley, head of foreign exchange strategy at Rabobank, said: “Although the expected repricing of the Bank of England boosted the pound last month, as the fall budget approaches, the UK will still be exposed to fiscal risks, which is likely to continue to be a headwind for the pound.”

British Chancellor of the Exchequer Reeves is facing tremendous pressure before the fall budget is introduced. According to forecasts, uncontrolled government borrowing has caused a fiscal deficit of 50 billion pounds. Despite warnings that another tax increase will only further curb the weak economic growth of the UK, outsiders generally expect that Reeves will raise taxes again in the fall budget to make up for the huge fiscal deficit.

Opponents warned that if Reeves chooses to raise taxes to fill the fiscal deficit, it will only further worsen the current situation. They insisted that Reeves should cut spending rather than raise taxes.

It is worth mentioning that several famous economists have previously warned that Reeves' tax and spending policies are pushing the UK into a debt crisis similar to the 1970s, and may force Britain to seek bailouts from the International Monetary Fund (IMF). They believe that Reeves' approach to the economy may cause Britain to repeat the mistakes of the era of high inflation and high borrowing, and eventually have to borrow from the IMF again, just like 50 years ago (1976 pound crisis). At the same time, major players in the UK retail industry have also warned that taxes and complicated administrative procedures are intensifying, pushing the UK into an era of “stagflation,” and food price inflation may remain around 5% next year.

Jagjit Chadha (Jagjit Chadha), the former director of the British National Institute of Economics and Social Research (NIESR), pointed out that the current economic situation in the UK “may cause collapse,” and he believes that the current financial situation is “as dangerous as the situation when Britain was forced to seek help from the IMF in 1976.”

Andrew Sentance (Andrew Sentance), a former member of the Bank of England's monetary policy committee, also said that the current situation is “very similar to the 1970s.” He pointed out that Reeves' fiscal policy could lead to a “Healy crisis” similar to 1976 in 2025 or 2026. He said that like Denis Healey (Denis Healey), who was Britain's Chancellor of the Exchequer in 1976, Reeves drastically increased public spending, borrowing, and taxes, which drove demand-driven and cost-driven inflation. “If policies are not changed, the UK will face economic collapse.”