The biggest factor pushing up rates is the credibility of the borrowing plans set out by major countries. The increase is not based on fears about countries “going bankrupt”.
But it is based on the brutal market equation that if a country wants to borrow more, and to do so without a credible plan, especially if there are doubts over the stability of a given government, it should expect to pay a higher rate.
Influential economists lean on different factors. Mohamed el-Erian told me the AI competition in bond markets was the biggest new factor.
Lord Jim O’Neill, says the recent action has been caused by uncertainty about US policy, and in particular efforts by the US Government to try to manage down surging yields.
This brings us to the UK. The profound and rolling instability of multiple prime ministers, chancellors, policy U-turns and the seeming inability to push through major structural change in this country over the past decades, has attracted a premium.
It was part of Sir Keir Starmer’s strategy to try to take on boring reforms and offer markets stability in a bid to lower borrowing costs.
It was a shock to many in the markets that despite a landslide majority, Labour could not push through plans to cut Britain’s welfare bill. This added to the ups and downs in the gilt markets – the trade in British government debt.
Actually, there are signs of green shoots in the underlying economy. Economic growth has been faster than peers so far in 2026, despite the energy price spike.
Measures of consumer confidence have ticked back up again. The PM is hoping to build on these signs to help rebuild the economy.
But the ongoing rout in global bond markets raises serious questions about the coherence and detail of Burnham’s broader plans.
“More public control” and more support for those struggling with the cost of living sounds like a plan for more spending, while the former could turn off potential investors looking at the country.
Burnham’s former economic adviser, Lord O’Neill, told me yesterday that the PM’s 10-year plan, expected in November, needs to set out how he will tackle “excessive spending”.
Lord O’Neill believes showing investors he can be decisive on the state pension or the welfare bill will give him breathing room to focus on his favoured infrastructure investments.
As interest rates tick up, the trade offs facing the prime minister only get more difficult.
