UK short-term borrowing costs have jumped to a post-financial crisis high as traders increase bets on faster Bank of England interest rate rises and a looming recession.
The yield on two year government debt – which is sensitive to interest rate expectations – rose by more than 20 basis points to 2.9pc on Wednesday. This is the highest since the end of 2008, when Lehman Brothers filed for bankruptcy.
Benchmark 10-year borrowing costs also jumped to almost 2.7pc, the highest level since 2014. Cheaper long-term borrowing costs suggest traders expect faster rate rises to trigger a recession.
Expectations of sharper rate increases have grown 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, a strategist at Bank of America, said: “People’s perceptions of the scale of fiscal support has gone up, which means the total cost of measures to safeguard the population has gone up. There’s a belief that rates will need to rise more to offset that and help keep a lid on inflation.”
Investors now believe Threadneedle Street will increase interest rates to well above 4pc in 2023, from a current level of 1.75pc.
Bets on faster rate rises have also pushed up borrowing costs around the world. Yields on German, Italian and French debt also rose on Wednesday, though not as sharply as UK gilts.
Borrowing costs are rising as governments around the world rush to secure energy supplies this winter to avert a crisis.
New figures showed North Sea gas production surged by more than a quarter in six months as the UK stepped up efforts to wean itself off Russian energy imports.
Domestic gas production in the first half of the year was 26pc higher – or 3.5bn cubic metres – than last year, enough to heat almost 3.5m homes for a year, according to Offshore Energies UK.
Higher North Sea output comes as Britain looks to cut 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. The ambition has been dealt a blow after Russia was forced to scrap a cargo due to payment issues.
Sakhalin Energy, the new company set up by the Kremlin to tighten its control over a major liquefied natural gas facility in the country, scrapped a shipment to at least one North Asian customer due to payments issues and delays signing revised contracts.
Moscow seized ownership of the plant earlier this month and customers were asked to commit to new deals and send payments to Russian banks.
Few buyers have signed the revised contracts, which could threaten the flow of gas to markets including Japan and South Korea.
Gas prices fell back from 14-year highs on Wednesday despite reports of a delay in the restart of Freeport LNG’s Texas export terminal.
A fire at the Texas plant in June shut production, which is not expected to resume at full capacity until March 2023.