The pound sterling fell on Thursday to its lowest level since late 2023, weighed down by a global bond sell-off that pushed U.K. government borrowing costs to their highest in 16 years.

Concerns about the country’s fiscal outlook have appeared. The pound was down 0.5% at $1.2305, after plunging 1.6% yesterday to its weakest point since November 2023. Meanwhile, the cost of hedging against price swings over the next month surged to its highest since the banking crisis of March 2023.

GBP/USD

Global bond yields spiked this week amid fears of rising inflation, diminishing chances of interest rate cuts, uncertainty over how U.S. President-elect Donald Trump will handle foreign or economic policy, and the prospect of trillions in additional debt.

U.K. 10-year government bond yields, or gilts, jumped by a quarter-point this week alone, reaching their highest levels since 2008 as confidence in Britain’s fiscal outlook deteriorates. By Thursday afternoon in London, some selling pressure had eased, leaving yields flat around 4.81%.

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Finance Minister Rachel Reeves faces her first major test as the bond market turmoil threatens to force spending cuts.

Bond Yields Gilts

Ordinarily, rising bond yields would support the pound, but this relationship has broken down, reflecting investor unease over the country’s financial stability.

The bond market is starting to discipline the U.K. government. Right now, they are trying to fight the market, and that never ends well.

In a statement issued late Wednesday, the U.K. Treasury pledged to maintain “firm control” over public finances in response to the mounting pressures.

Ignacio Teson

Economist and Financial Analyst

Ignacio Teson is an Economist and Financial Analyst. He has more than 7 years of experience in emerging markets. He worked as an analyst and market operator at brokerage firms in Argentina and Spain.