UK Corporate Debt Costs Soar Above US Peers

(Bloomberg) — The cost of money for UK companies is rapidly rising compared with firms across the Atlantic.

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With UK economic data this week suggesting that the Bank of England has a lot more to do to get inflation under control, the yield spread of sterling investment-grade bonds over their dollar peers has been widening fast.

A 21 basis point jump this week took the spread to the widest since October, when the UK market was recovering from the turmoil caused by then-Prime Minister Liz Truss’s ill-fated budget. The indexes have a one-day lag.

This time the divergence is being fueled by persistent inflation in the UK, which is increasingly looking like an outlier in the global battle to get rising prices under control.

Data showing faster-than-anticipated wage growth prompted traders to price in around a one-in-three chance that the Bank of England will raise its key rate to 6% by early next year. The yield on short-term government bonds, the most sensitive to interest rate moves, jumped this week to the highest since 2008.

Figures on Wednesday showing that the UK economy bounced back in April may further embolden the central bank to be more aggressive. The BOE next meets to set rates on June 22.

In the US, meanwhile, the Federal Reserve is expected to leave its benchmark rate unchanged for the first time in more than a year on Wednesday. Even though inflation is well above the central bank’s target, both the consumer price index and core CPI — which excludes food and energy — decelerated on an annual basis in May.

This all translates to higher borrowing costs in the sterling market compared to peers. Investment-grade companies have seen yields rise almost 70 basis points this year, about six times the increase in costs for firms that issue in dollars, according to Bloomberg indexes. On top of that, UK firms are dealing with labor shortages, high operating costs and supply-chain issues.

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Excluding the blowout caused by Truss’s budget, sterling borrowers face the highest refinancing costs since 2009. But the pressure isn’t just on companies. Earlier this month, a London commuter town declared bankruptcy in all but name after an investment spree left the council with a £1.2 billion ($1.5 billion) deficit.

For individuals in the UK, costs are also rapidly rising. Mortgages have seen a fresh jump in rates and the housing market, often seen as a barometer for the health of the economy, is facing significant hurdles as the nation copes with the worst cost-of-living crisis in decades.

–With assistance from James Hirai.

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