Key facts
- US Treasury sold $25bn of 30-year bonds at yields as high as 5.22%, the highest since August 2001.
- Analysts warn that rising US borrowing costs could lead to a severe recession in the UK.
- The US debt pile has swelled to a record $40 trillion.
- Concerns over the US deficit and persistent inflation are driving up Treasury yields.
- A sharp repricing of US Treasuries could have significant repercussions for global markets, especially highly indebted economies like the UK.
The UK economy faces a significant recession risk if US borrowing costs continue to escalate, according to warnings from City analysts. The US Treasury's recent auction of $25bn in 30-year bonds saw yields reach 5.22%, the highest since August 2001, amid concerns over the nation's large deficit and persistent inflation.
Analysts suggest that a sharp repricing of US Treasuries could trigger a global debt crisis, with countries like the UK, which have high debt-to-GDP ratios, being particularly vulnerable. Roger Lee, head of equity strategy at Cavendish, stated that the knock-on effects of a Treasury market rout would be 'very bad' for the UK, potentially leading to higher mortgage and corporate debt servicing costs, and possibly a recession.
Helen Thomas, chief executive of Blonde Money, noted that if fresh US bond auctions continue to demand higher yields and lower prices, the financial system could become strained, impacting all markets. The US debt pile has reached a record $40 trillion, with its deficit widening significantly since Donald Trump took office, partly due to tax cuts that were not offset by spending reductions.
While UK concerns about government debt had previously focused on its domestic gilt market, the interconnectedness of global markets means a sell-off in US debt would inevitably affect the wider financial system. This would not only harm the UK economy's growth prospects but also increase the government's borrowing costs, further pressuring public finances. James Sproule, chief economist at Handelsbanken, advised Chancellor John Healey to exercise extreme caution in his upcoming budget on October 28, adhering to fiscal 'golden rules' regarding debt and deficit reduction.