Gilt yields, the interest paid to investors in government bonds, are now higher that when doomed Prime Minister Liz Truss’s mini-Budget caused a markets meltdown last year.
The trading of bonds, known as gilts, are used to price mortgages and loans, The Sun reported.
When interest rates go up, prices drop and yields go up. Strong wages growth of 7.2 percent this year has pushed up inflation.It is feared the Bank of England will now have to further hike interest rates to try to bring inflation under control.
The rise in yields also makes it more expensive for governments to borrow.
Samuel Tombs at Pantheon Macroeconomics said, “The renewed pick-up in wage growth will add fuel to the recent rise in gilt yields and expectations for the future path of the bank rate.”
The BoE is predicted to hike rates again from 4.5 percent.
Chancellor Jeremy Hunt said, “We are really very aware of the pain felt by many families.
“But the biggest single thing that we can do is support the Bank as they bear down on inflation,” he added.
Meanwhile a record 2.6million people are signed off work with long-term sickness. Government bonds are like the oil of the financial system engine — essential for making money flow. The trading of bonds, known as gilts, are used to price mortgages and loans.
When interest rates go up, gilt prices go down and gilt yields go up. Their trading is a big indicator for market predictions on interest rates end up.
Bond yields are the amount an investor gets for owning the debt issued by the Government. When a bond price falls, the yield rises as investors want a better return for their weaker asset.
Kwasi Kwarteng and Liz Truss’s unfunded mini Budget last year caused a meltdown and government bond prices plummeted, causing mortgage costs to surge and the Bank of England to intervene.
Calm was restored in the spring but now two-year bond yields have jumped even higher than the levels last October on fears that the Bank will have to raise interest rates to around 5.76.
As a result, the yield on a two-year government bond has leapt to 5.7 percent, above last October’s 5.6 percent and back to levels last seen at the peak of the 2008 financial crisis.
It is a concern because it impacts how mortgages will be priced and means the Government will have more expensive costs on its £137billion of borrowing — leaving less in the coffers to fund tax cuts.
The Bank of England is trying to bring down inflation by raising interest rates, because it typically encourages people to save. UK inflation at 8.7 percent is still four times higher than the Bank’s 2 percent target.
The Bank is also worried that wage increases will lead to inflation becoming even stickier as companies cover higher staff costs by jacking up product prices.
The market expects the Bank to raise the rate from 4.5 percent to 5 percent on June 22 and up to 5.76 percent next year, pushing up borrowing and mortgage costs.
This means the average variable mortgage rate will rise to as high as 8.77 percent.
For a household on a two-year, £100,000 fixed mortgage who remortgage when rates hit 5.75 percent, monthly costs will rocket 80 percent from £391 per month in 2021 to £707.