By: Fiona Cincotta, Senior Market Analyst
UK gilt yields sit close to their highest level since 1998, and the cost is spreading well beyond the bond market. Higher borrowing costs weigh on UK business investment by making it more expensive for companies to borrow, invest and hire, just as elevated mortgage rates drain household spending power. The UK construction sector remains in contraction and the UK housing market is cooling. That leaves domestically focused companies under more pressure than the multinational names that dominate the FTSE 100.
Fiona Cincotta, StoneX Senior Market Analyst, has spent more than 15 years trading and analyzing UK, European and U.S. markets, combining macroeconomic, fundamental and technical analysis. Her coverage spans forex, equities and commodities, with a particular focus on UK and European market themes such as the link between gilt yields, domestic growth and the FTSE 100.
UK business investment is under pressure because elevated gilt yields push up financing costs for companies across the domestic economy. According to Cincotta, "higher financing costs also make [it] more expensive for businesses to borrow and invest. And that potentially slows capital expenditure for hiring as well". The squeeze reaches the FTSE 100 most directly through retailers and consumer discretionary stocks, which depend on UK demand. Persistently high gilt yields and mortgage rates therefore keep the pressure on UK growth, with a sustained decline in yields the main route to relief.
"If we see a slowing housing market, that also tends to weigh on consumer sentiment, and also has a ripple effect across the economy as well," Cincotta explains. Nationwide data shows annual UK house price growth halving in a single month, as higher mortgage repayments force buyers to think twice about affordability and leave refinancing households with less disposable income. The UK construction PMI is expected to remain in contraction, highlighting ongoing weakness in that sector of the domestic economy. Housing, construction and business investment now face the same headwind, namely higher borrowing costs that ripple out across the UK economy.
--- Written by Frédéric Guétin, StoneX Media Producer
--- Expert: Fiona Cincotta, StoneX Senior Market Analyst
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