Lenders are closely monitoring the turmoil in the bond markets before deciding whether to lift mortgage rates.
This week, 30-year UK government borrowing costs hit their highest level since 1998, while the pound slumped to its lowest level in over a year.
Bond markets have taken fright over the impact widespread global tariffs might have if incoming US President Donald Trump carries through his threats.
As part of that assessment, investors are looking again at Chancellor Rachel Reeves’ October Budget plans to spend £70bn over five years and pricing UK borrowing at a higher rate.
Yesterday, chief secretary to the Treasury Darren Jones moved to reassure parliament, while the Chancellor went ahead with a trade visit to China.
Jones said: “In recent months, moves in financial markets have been largely driven by data and geopolitical events, which is to be expected as markets adjust to new information.
“UK gilt markets continue to function in an orderly way and underlying demand for the UK’s debt remains strong.”
In early Friday trading, trading was calmer but the trend is still worrying. UK bond 30-year yields are almost 2 basis points higher, at 5.38%. The pound was worth £1.23 against the dollar, down 0.98% over the last five days.
Former Monetary Policy Committee member Professor Martin Weale points out that in more normal times, a rise in government borrowing costs tends to lead to a stronger currency.
When both fall together, it can mean a sign of fiscal de-anchoring, and potential capital flight out of the UK, which last happened in the 1976 monetary crisis.
Two-year swap rates rose to 4.306% on 8 January from 4.046% a month ago, while five-year rates lifted to 4.168% from 3.767% over the same period, according to Chatham Financial.
Hargreaves Lansdown head of personal finance Sarah Coles says: “The rise in gilt yields always raises the spectre of rising fixed mortgage rates, because they’re very responsive to changes in interest rate expectations.
“Rates have already crept up very slightly, but there’s no need for prospective borrowers to panic at this stage.
Coles adds: “Although the bond markets have thrown a wobbly, it hasn’t particularly altered expectations of what the Bank of England is likely to do to rates.
“The market is still pricing in just over a 60% chance of a rate cut in February – it has moved from 66% to 64%, but that’s nothing to frighten the horses.”
“The bond market in the UK reacted dramatically to news out of the US – more so than other markets around the world. In the coming days, this could subside if the bond markets decide they’ve got a bit ahead of themselves.
“Of course, there are no guarantees If more worrying news comes out of the US, or fears of stagflation spread, bond yields could remain higher, and if this happens, there’s more of a chance it will be reflected in more widespread higher mortgage rates.”
AJ Bell head of investment analysis Laith Khalaf points out: “Rising yields also mean we are likely to see firmer pricing in the mortgage market, which will go down like a cup of cold cauliflower soup for anyone who is remortgaging or has decided to make the first giant leap onto the housing market.”
Khalaf adds: “There are no easy answers to the question of why markets move, especially over a short time frame, and sometimes it’s simply a matter of momentum.
“However, the fact yields are rising on both sides of the Atlantic does suggest the new year has brought with it a focus on the incoming US president, and the potential for his trade and immigration policies to be inflationary, which has implications for both economies.
“Bond investors might also be looking at the giant stacks of government debt already on the books on both sides of the pond and saying thanks, but no thanks.”
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