Franklin Dampson predicts that the UK 30-year government bond yield will reach 6%, warning that a fiscal reckoning day will eventually come.

David Zahn, European fixed income manager at Franklin Templeton, said that the UK government will struggle to afford its spending, which will push the 30-year UK government bond yield to 6% in the next year. Despite Chancellor Rishi Sunak successfully increasing the country's fiscal cushion in last week's budget, she relies on a series of tax measures that will not take effect for many years. Zahn said on Wednesday that these tax increases are "very fragmented." He reiterated his forecast for a 6% yield, even though the budget has been generally well received in the market. "Once bond yields rise to a high enough level, the government will be forced to truly address the fiscal situation, rather than pushing the problem forward." Zahn has been calling for an increase in UK government bond yields since April. He cleared all his UK government bond positions in March, stating that the UK market is most vulnerable to increased spending given the country's dire fiscal situation. His reverse prediction that the 30-year yield will reach 6% has not yet materialized. The yield briefly rose to 5.75% in early September, before falling back to 5.2% at Wednesday's close. An index tracking UK government bonds has risen over 4% so far this year, on track to deliver the best annual return since 2020. UK government bonds have recorded their best performance in two years, attracting global investors. The UK's borrowing costs are among the highest in developed countries: its 30-year government bond yield is 180 basis points higher than Germany's equivalent bonds and 80 basis points higher than France's. Tax uncertainty Despite the UK Debt Management Office reducing the issuance of long-term bonds, the uncertainty of the budget and inflation prospects have offset the impact of reduced supply. "It is difficult for anyone to predict how much money can be raised from the taxes announced by Sunak," Zahn said, "the actual amount raised may be less than their expectations." Zahn noted that these measures will take effect around the next general election expected in 2029, when the government may be inclined to avoid any politically unfavorable actions. "It is very unusual for any government to significantly increase taxes close to an election," he said.