Bond markets give tough verdict on Labour government’s economy management
British homeowners are bracing for another bout of pressure on their wallets, as the government’s rising borrowing costs ripple directly through to the mortgage market.
Yields on long-term gilts — the bonds through which the Treasury finances Britain’s debt — have surged to levels not seen since the late 1990s. Once the preserve of pension funds and cautious savers, gilts have become a barometer of investor confidence in Britain’s economic management. The message from markets today is uncomfortably clear: lenders are demanding a higher premium to finance the state, and households will pay the price.
The link between gilt markets and mortgage rates is both direct and unforgiving. Mortgage lenders price their products in part against the swap rates that move in line with government bond yields. When investors demand more to hold gilts, banks swiftly adjust.
Read more: What mortgage professionals should expect from the autumn Budget
For families rolling off fixed-rate deals in 2025, the timing could hardly be worse. More than a million borrowers are due to refinance this year, many of them moving from ultra-low pandemic-era rates onto products closer to 5 or 6 per cent. On a typical £200,000 loan, that shift could add hundreds of pounds a month to repayments.
Much of the turbulence stems not just from economic data but from politics. The Labour government’s efforts to reassure investors have been tested, with Chancellor Rachel Reeves facing scrutiny after comments on spending discipline drew nervous reactions in gilt markets. Prime Minister Sir Keir Starmer’s balancing act — promising growth and investment while keeping the deficit in check — will be judged ruthlessly by bondholders.
Every wobble in confidence is transmitted swiftly into the mortgage market. Homeowners thus find themselves hostage not only to central bank policy in Washington and London, but to the credibility of Westminster.
What Comes Next?
The Bank of England is under pressure to consider rate cuts, particularly if US inflation softens and the Federal Reserve leads the way. A Reuters poll found that out of 62 economists, 50 predicted a 0.25% cut – but not until November. And even if there is a further interest rate cut, any easing from Threadneedle Street may be offset if gilt yields remain stubbornly high. In effect, even if the Bank lowers the base rate, markets may prevent mortgage rates from falling as quickly as borrowers hope.
For now, the message to homeowners is one of realism. Britain’s gilt market, once a quiet corner of finance, has become the stage on which the fate of millions of household budgets is set. And unless investor nerves settle, the strain on borrowers will only intensify.
