4 lessons for the UK from bond markets

Britain faces among the highest borrowing costs of any developed nation — but bond markets offer 4 key lessons the government can embrace to remedy the issue, according to former U.K. Treasury minister Jim O’Neill.

Speaking on CNBC’s Squawk Box Europe, the former economist and Goldman Sachs asset management chief said that the U.K. government needs to stop obsessing with social media and the “next 24 hours”, and instead focus on the big issues facing the country.

It comes after U.K. government bonds — known as gilts — came under heavy selling pressure on Tuesday amid calls for Prime Minister Keir Starmer to resign. While Starmer insists he is going nowhere, Britain could soon see its fourth leader in as many years.

“We have got to get rid of the triple lock,” O’Neil told CNBC, referencing Britain’s state pension which is guaranteed to increase annually by the highest of three metrics; consumer price inflation, average earnings growth, or a minimum of 2.5%.

“We have got to do something about very misallocated welfare payments,” he added. “We have got to do something substantial about how we tax the housing market. And we’ve got to do something to stop this… persistent belief that. whatever happens, we’re going to spend more and more of our government money on rising NHS costs.

“It’s just not sustainable.”

U.K. bonds initially rallied on Wednesday morning, reversing course after the previous trading session saw borrowing costs surge to generational highs. But yields later shifted into positive territory and then fluctuated around the flatline.

The renewed volatility came amid reports that Health Secretary Wes Streeting is preparing to resign. A subsequent story from the BBC claimed his political allies had told the broadcaster he was planning to launch a leadership coup as soon as Thursday.

Streeting has long been reported to covet the top job in government, and is widely seen as a frontrunner to replace Starmer.

By 12:47 p.m. in London, the yield on the benchmark 10-year gilt traded less than 1 basis point lower at 5.095%.

The previous day saw the 10-year gilt add 9 basis points to hit its highest level since 2008.

Bond yields and prices move in opposite directions, with traders often commanding higher yields on debt investments when confidence in the government issuing the bonds is shaken.

Starmer’s leadership hangs in the balance after his party’s poor performance in the U.K.’s local elections last week led to widespread demands from lawmakers for his resignation.

His position appeared more stable by Wednesday morning. While 90 members of parliament from the governing Labour Party have called on the prime minister to step down, more than 100 signed a statement backing Starmer to stay put.

The prime minister has repeatedly refused to step aside, saying he plans to see his mandate through and pointing out that no contender has formally stepped forward…