Yields on UK 5-year bonds now point to more risk than Greek and Italian debt

  • Five-year gilt yields soared more than 51 basis points on Monday to 4.579% amid fallout from the UK government’s tax plan.
  • Yields on Greek and Italian five-year bonds were 3.978% and 4.079% respectively.
  • This indicates that the markets see more risk in the medium-term debt of the United Kingdom than in that of the most indebted members of the euro zone.

Medium-term borrowing costs in the UK jumped on Monday as investors fret over a plan to cut taxes in Britain.

The yield on five-year bonds jumped more than 51 basis points on Monday to 4.579%, topping rates like Greece and Italy. Yields on Greek and Italian five-year bonds were 3.978% and 4.079% respectively.

This indicates that markets see more risk in UK gilts over the medium term than in equivalent bonds from the most indebted countries in the euro zone.

In July, Greece had a debt-to-GDP ratio of 189.3% and Italy’s of 152.6%, which is the top two in the monetary union. That of the United Kingdom was 99.6% in July.

Britain’s debt, along with the pound, fell after Britain’s new chancellor detailed a series of potential tax cuts and hinted more were on the way. Investors feared the cuts would not only increase public debt but also fuel inflation, prompting the Bank of England to raise interest rates more aggressively and potentially drag the UK economy into a deep recession.

For now, yields on 10-year debt in the UK are still below those of Greece and Italy, although the spread has started to narrow.

But the surge in the yield of five-year gilts beyond Greek and Italian bonds of the same maturity is also notable, as the two southern European countries have been among the flashpoints of the eurozone debt crisis. ten years ago.

At the time, yields on the so-called PIIGS – Portugal, Italy, Ireland, Greece and Spain – surged as markets doubted their ability to service their high debt amid weak economic growth.

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