Yields on 10-year U.K. government bonds exceeded those on similar-maturity French bonds for the first time in more than 20 months, signaling rising borrowing costs for the government of Prime Minister David Cameron.
The rate on the U.K.’s benchmark government securities rose five basis points, or 0.05 percentage point, to 2.118 percent at 8:54 a.m. London time, compared with a 2.116 percent yield on 10-year French bonds. That’s the first time since April 11, 2011, that U.K. yields have surpassed those of France, according to data compiled by Bloomberg and based on closing prices.
“It means having to pay more for debt so that’s a problem” for the U.K., said Neil Jones, head of European hedge fund sales at Mizuho Corporate Bank Ltd. in London. “Gilts are deemed a safe haven, so I would suggest to an extent this is gilts being sold as an unwinding of the safe-haven trade.”
The yield on 10-year gilts has risen 29 basis points this week, the most since the five-day period ending March 16, signaling the U.K. government will have to pay more to finance its budget deficit even as Chancellor of the Exchequer George Osborne extends his austerity program.
The U.K. is rated AAA with a negative outlook at Standard & Poor’s, Moody’s Investors Service and Fitch Ratings, while France was stripped of its top grade by S&P and Moody’s last year. Since the S&P move on Jan. 13, French bonds have returned 9.3 percent, according to Bank of America Merrill Lynch indexes, outperforming gilts’ 0.5 percent gain.
“We get a daily verdict on the credibility of our economic policy from bond investors,” Osborne told parliament on Dec. 5.
The global bond market disagreed with Moody’s and S&P’s ratings more often than not last year. Yields on sovereign securities moved in the opposite direction from what the companies suggested in 53 percent of the 32 upgrades, downgrades and changes in credit outlook, according to data compiled by Bloomberg.
That compares with the longer-term average of 47 percent, based on more than 300 changes since 1974.