Investing.com — The United Kingdom’s fiscal position is under pressure from rising gilt yields, but the country is better placed than some of its peers to absorb the strain, according to UBS.
Gilt yields have risen and forward rates now suggest they may remain elevated or climb further, the bank’s economist Dean Turner said. “For a country with a debt stock north of 90% of GDP and a government deficit still stubbornly wide, this is not a trivial matter,” he said in a note.
Higher yields translate directly into higher debt servicing costs, which, without strong economic growth or significant fiscal tightening, can compound quickly.
But Turner pushed back on the more alarmist narrative, placing the U.K.’s situation in a global context. The rise in yields, he argued, is not the product of domestic policy missteps but a global phenomenon driven by inflation, with the closure of the Strait of Hormuz and the resulting energy price spike sending bond markets higher across the world.
“The U.K., as ever, finds itself swept along by the global tide, but not without its own idiosyncrasies,” he wrote.
The U.S. is running a deficit approaching 8% of GDP with rapidly rising debt servicing costs, while Japan’s debt-to-GDP ratio remains above 200%. France and Italy face more acute vulnerabilities, with persistent deficits and heavier debt burdens leaving them exposed to further yield increases, and without the same likelihood of central bank intervention that the U.S. and Japan enjoy.
By comparison, the U.K.’s position is helped by the long average maturity of its debt. Over the next 12 months, the government needs to issue bonds worth roughly a third of annual revenues, a figure that compares favourably with more than 100% in the U.S. and Japan.
“This insulates the Treasury from the full impact of recent market moves in the short term,” Turner said.
The main domestic vulnerability, the economist noted, lies in the high proportion of inflation-linked gilts — just under a quarter of total borrowing — which means persistent inflation feeds directly into higher servicing costs. Political uncertainty adds a further premium to what investors demand to hold U.K. debt, Turner said.
“The U.K. is neither in the best nor the worst position when it comes to the sustainability of public finances,” he concluded, adding that the current bout of market nerves serves as a reminder that government finances across the board face greater scrutiny in a world of higher inflation and elevated yields.