Borrowing costs

Government borrowing costs hit their highest level since the financial crisis as traders bet on a sharp rate hike

youK’s short-term borrowing costs have hit a post-financial crisis high as traders increase bets on faster Bank of England interest rate hikes and a looming recession.

The yield on two-year government debt – which is sensitive to interest rate expectations – rose more than 20 basis points to 2.9% on Wednesday. This is the highest since late 2008, when Lehman Brothers filed for bankruptcy.

Benchmark 10-year borrowing costs also jumped to nearly 2.7%, the highest level since 2014. Cheaper long-term borrowing costs suggest traders expect higher faster rates trigger a recession.

Expectations for steeper rate increases have risen as forecasts for energy bills continue to climb and expectations grow that the next prime minister will have to do more to help struggling households.

Mark Capleton, strategist at Bank of America, said: “People’s perception of the magnitude of fiscal support has increased, which means the total cost of protecting people has increased. It is believed that rates will have to increase further to offset this and help contain inflation.”

Investors now believe Threadneedle Street will raise interest rates to well above 4% in 2023 from a current level of 1.75%.

Bets on faster rate hikes have also pushed up borrowing costs around the world. Yields on German, Italian and French debt also rose on Wednesday, but not as sharply as UK gilts.

Borrowing costs are rising as governments around the world race this winter to secure energy supplies to avert a crisis.

New figures show gas production in the North Sea has jumped by more than a quarter in six months as the UK steps up efforts to wean itself off Russian energy imports.

According to Offshore Energies UK, domestic gas production in the first half of the year was 26% – or 3.5 billion cubic meters – higher than last year, enough to heat nearly 3.5 million households for one year.

The increase in North Sea production comes as Britain seeks to sever its ties with the Kremlin’s energy sector and boost its energy security.

Russian President Vladimir Putin wants to sell gas to Asia to replace lost European trade. Ambition was sorely tested after Russia was forced to scrap a shipment due to payment issues.

Sakhalin Energy, the new company created by the Kremlin to tighten its control over a major liquefied natural gas facility in the country, scrapped a delivery to at least one North Asian customer due to payment issues and delays in the signing of revised contracts.

Moscow took possession of the plant earlier this month and customers were asked to sign new agreements and send payments to Russian banks.

Few buyers have signed the revised contracts, which could threaten the flow of gas to markets such as Japan and South Korea.

Gas prices fell Wednesday from 14-year highs despite reports of a delay in restarting the Freeport LNG export terminal in Texas.

A fire at the Texas factory in June halted production, which is not expected to resume at full capacity until March 2023.