UK borrowing costs decrease, on track for first daily decline in 2025 due to decreased inflation concerns.

• On Wednesday, U.K. borrowing costs decreased significantly due to the release of lower-than-anticipated consumer inflation data in both the UK and the US.
• The release of U.K. inflation data showing an annual increase of 2.5% in December, just below the forecast of economists polled by Reuters of 2.6%, was met with cheers from investors. The closely-watched services inflation also dropped to 4.4% from 5%, its lowest level since March 2022.

On Wednesday, U.K. borrowing costs decreased significantly due to the release of lower-than-anticipated consumer inflation data in both the U.K. and the U.S.

The yield on 4.727% at 4 p.m. in London was 16 basis points lower than its highest level since 2008, putting it on course for its first daily decline since Dec. 31. This decline was due to a surge in concerns over the country's growth outlook and debt load since the start of the year.

The yield on U.K. bonds, commonly referred to as gilts, decreased by 15 basis points to 4.45%. Similarly, the yield on long-term 30-year bonds plummeted 15 basis points from its record high of 27 years.

The release of U.K. inflation data showing an annual increase of 2.5% in December, just below the forecast from economists polled by Reuters of 2.6%, was met with cheers from investors. Additionally, closely-watched services inflation dropped to 4.4% from 5%, its lowest level since March 2022.

The Bank of England's expected interest rate cut in February was reinforced by the print, providing much-needed good news for Finance Minister Rachel Reeves.

Reeves faces economic stagnation and may violate his own fiscal rules, which require all daily government spending to be funded through revenues, aiming to decrease the country's debt-to-GDP ratio. The U.K.'s monthly growth data for November will be released on Thursday.

Despite recent bond market moves, the U.K. bond market remained stable during a mid-morning auction of 2034 bonds, with solid demand for U.K. debt, although at lower levels than the previous year.

The release of the U.S. consumer price index accelerated declines, easing concerns about inflation and driving U.S. Treasury yields sharply lower. Although the U.S. headline CPI was in-line with forecasts on an annual basis, core inflation excluding food and energy was slightly lower than expected.

In 2025, traders prepared for a cautious pace of interest rate cuts from the Federal Reserve by selling off U.S. Treasurys.

AXA Investment Managers' G7 economist Gabriella Dickens warned that the decline in U.K. headline inflation is likely temporary due to the ongoing easing of energy price drag.

Dickens stated that the U.K. does not have an inherent inflation issue, as markets have recently shown concern about it.

"The possibility of inflation falling below the target in the medium term is increasing, and we believe the Bank of England will continue to disregard near-term price pressures."