UK fiscal "black hole" scares markets! 30-year government bonds suffer heavy sell-off, pound posts biggest single-day decline since June 17th.

Due to increasing concerns among investors about the sustainability of the UK public finances, on Tuesday, the UK 30-year gilt yield rose to its highest level since 1998, the pound fell by over 1%, marking its largest single-day decline since June 17. Data shows that the UK 30-year gilt yield rose by 5 basis points on Tuesday, reaching a high of 5.69%, the highest level since May 1998. At the same time, the pound fell by 1.2% against the US dollar, to 1.33; the pound dropped by 0.7% against the euro, to 1 euro to 86.98 pence. The weakness in UK government bonds comes as major bond markets worldwide are experiencing selling pressure, with market focus once again turning to the rising debt levels. The significant drop in the pound is also notable, highlighting the vulnerability of the UK market as concerns about the UK government's ability to implement fiscal restraints continue to grow. According to the UK government's own forecasts, fiscal spending is expected to account for 60% of GDP, compared to just 53% during the pandemic. Meanwhile, income as a percentage of GDP is expected to slightly decrease, falling below 40%. As a result, the UK is set to face enormous national debt - by 2073, UK debt is projected to reach 274% of GDP, meaning the deficit will reach 21% of GDP; just the interest on this debt will amount to about 13% of GDP. Lloyds Bank foreign exchange strategist Nick Kennedy stated, "The UK's fiscal background has always been very dangerous, and this situation will continue." "This summer, the interest rate market has already priced in a certain risk premium. Now, investors are also demanding a higher risk premium for the pound." Rabobank's head of foreign exchange strategy Jane Foley said, "Although the repricing of expectations for the Bank of England boosted the pound last month, with the autumn budget approaching, the UK will still be exposed to fiscal risks, which are likely to continue to weigh on the pound." Ahead of the autumn budget, UK Chancellor Rishi Sunak is facing immense pressure. According to forecasts, uncontrolled government borrowing has resulted in a 500 billion fiscal deficit. Despite warnings that further tax hikes would only further suppress the UK's weak economic growth, there is widespread expectation that Sunak will impose additional taxes in the autumn budget to cover the huge fiscal deficit. Opposition politicians have warned that if Sunak chooses to fill the fiscal deficit by raising taxes, it will only worsen the current situation. They argue that Sunak should cut spending rather than raising taxes. Notably, several prominent economists have previously warned that Sunak's tax and spending policies are driving the UK towards a debt crisis similar to the 1970s and may force the UK to seek assistance from the International Monetary Fund (IMF). They believe that Sunak's handling of the economy could lead the UK back to high inflation and high borrowing levels, ultimately requiring another loan from the IMF, as in 1976 (the Sterling crisis). Meanwhile, key players in the UK retail industry also warn that increasing taxes and bureaucratic procedures are pushing the UK into a period of "stagflation," with food price inflation likely to remain around 5% next year. Former director of the National Institute of Economic and Social Research (NIESR) Jagjit Chadha pointed out that the current economic situation in the UK "could lead to a collapse," and he believes that the current fiscal situation is "just as dangerous as in 1976 when the UK was forced to seek help from the IMF." Former member of the Bank of England Monetary Policy Committee Andrew Sentance also stated that the current situation is "very much like the 1970s." He noted that Sunak's fiscal policy could lead to a "Healey crisis" similar to 1976 in 2025 or 2026. He said that like former UK Chancellor Denis Healey in 1976, Sunak has significantly increased public spending, borrowing, and taxes, driving demand-led and cost-push inflation, and "if the policy does not change, the UK will face an economic collapse."