Long-term borrowing costs hit the highest level since 1997! The UK bond market is likely to continue to "suffer."

As global borrowing costs rise under the influence of the U.S. Treasury market, the UK's high debt and low growth economic situation has once again become a focal point. The turbulence in the "stock, bond, and currency" markets is mutually influencing each other, putting the UK at risk of attacks from hedge funds. Analysts warn that after a brief rebound, the UK market is about to face "long pain" and is vulnerable to capital outflows.

On January 17, Reuters reported that traders expect the British pound to continue to fluctuate in the coming months. The depreciation of the pound is also forming a negative feedback loop, which not only suppresses market interest in investing in UK stocks but also affects market expectations for interest rate cuts. Moreover, the increasing debt burden will exacerbate the already stagnant economic growth.

There are signs that this pain will persist. Options trading data and evidence from hedge fund insiders and securities trading desks indicate that speculators have heavily bet on the decline of the pound and UK government bonds. Jack McIntyre, a fixed income portfolio manager at Brandywine Global, commented on the UK's "collapse":

"I don't think this situation will end anytime soon. Investors are still haunted by the crisis in UK government bonds and the pound triggered by former Prime Minister Liz Truss's 'mini-budget' before 2022."

Market trends in January show that the UK's long-term borrowing costs have reached a 27-year high, and the FTSE 250 index, focused on the domestic market, has fallen nearly 6% since August. A buy protection indicator measuring pound volatility is close to its highest level since March 2023.

Krishna Guha, vice chairman of U.S. investment bank Evercore ISI, stated, "Post-Brexit, the UK is more susceptible to buyer boycotts because it is no longer a core holding for many global investors, and the growth outlook is also not very clear."

The "pain" is compounding. The surge in debt costs is hindering Chancellor of the Exchequer Rachel Reeves' plans to restore growth through public investment, and analysts expect the pound to fluctuate again, which may deter foreign investors from investing in UK stocks facing exchange rate risks. Furthermore, hedge funds are also selling off the pound and UK government bonds. S&P Global Market Intelligence data shows that brokers are charging up to 30 basis points (0.3%) for providing UK government bonds to speculators, nearly double the 10-year average, indicating increased demand from short sellers.

However, some investors view this wave of selling as an entry opportunity. Mario Unali, head of investment advisory at hedge fund investor Kairos, believes that pessimism has now reached its peak and is considering increasing investments in the UK in the coming months