Investors now view Britain as a riskier lending proposition than Italy, with its cost of borrowing rising comfortably above the 4pc mark for the first time this year.
The yield on 10-year gilts rose briefly above the 4.1pc level in intraday trading and spent most of the day higher than the yield on benchmark Italian bonds, as fears over Britain’s fiscal credibility continued to haunt markets. The news came as analysts warned that hedge funds and other “smart money” traders had been largely responsible for leading the exodus out of UK government debt.
The Treasury’s cost of borrowing has risen by more than a percentage point since March, despite the Bank of England spending £200bn on gilts through its quantitative easing (QE) programme. Experts put the increase down to worries that this and future governments will either prove incapable of reducing their deficit or will resort to inflation in order to erode it. The combined effect has been to catapult UK government bond yields above those of Italy and Spain in the past few weeks alone.