A jump in bond yields: Bad news for mortgage holders, bad news for the Chancellor

ITV News Economics Editor Joel Hills discusses why the figures do not make for good reading for the chancellor

The government plans to borrow an extra £100 billion during this financial year in order to plug the gap between what it is spending and what it raises in tax. 

The cost of doing this has risen sharply. 

As of market-close today, international investors were charging the government an effective interest rate of 4.8% to borrow over a 10-year period. 

Back in July, when Labour won the election, what's called the "yield" on 10 year government bonds stood at 4.1%. 

On Budget Day (October 30), it stood at 4.3%. The UK is not alone. Investors have been offloading US, French, German and Italian government debt. 

The sell-off began in early December and has intensified in the last few days. 

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This has happened because the market view is that inflation and therefore interest rates in advanced economies are likely to remain higher for longer.  

Not least because the next president of the United States is promising sweeping tariffs, the mass deportation of migrants and big tax cuts for the wealthy and for businesses at time when the US economy is already growing robustly. 

ITV News' US partner, CNN, is reporting that Donald Trump is considering declaring a "national economic emergency" in order to restrict imports.  

There's a growing sense he intends to follow through on his election pledges.  

All this matters because when the UK government's borrowing costs go up, mortgage rates also tend to rise. 

And higher bond yields, if sustained, could be a huge problem for a chancellor who has promised to balance the books. 

Last October, the Office for Budget Responsibility (OBR) calculated Chancellor Rachel Reeves was on track to deliver on her promise to balance the current budget - the difference between the government's revenue and what it spends, excluding investment - by 2029/30 with £9.9 billion to spare. 

"If bond yields remains at this level, it means that the chancellor will have to stand up in the commons on March 26 and either admit she's broken her own fiscal rules or announce policies that will trim government spending or increase taxes,' said Paul Dale, chief economist at Capital Economics. In a statement, a Treasury spokesperson said "no one should be in any doubt that meeting the fiscal rules is non-negotiable".This commitment sounds set in stone and the chancellor has said previously she won't increase taxes or borrowing again.

So if something does have to give it is likely to be government spending.

A Spending Review which is intended to reinvigorate public services may be about to get a little tighter.

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