Borrowing costs for the UK government have plummeted due to an unexpected decrease in inflation both domestically and in the US, leading to speculation that central banks may reduce interest rates in the coming months.
The interest rate on key UK government debt has fallen below 4.8%, retracting after a surge last week when it reached its highest level in 16 years.
This development has alleviated pressure on Chancellor Rachel Reeves, who faced criticism for her Budget policies contributing to market instability.
The yield on 10-year gilts, the UK government's bonds, had been approaching 4.9%, reflecting investor concerns.
Analysts predict that the reduced inflation may prompt the Bank of England to contemplate further rate cuts to bolster the economy.
Investors are now betting on an interest rate cut next month and a second one before the year ends.
The optimism for lower borrowing costs was boosted by US inflation data indicating a slowdown in underlying price increases.
While overall inflation in the US rose to 2.9% in December, up from 2.7%, core inflation unexpectedly dropped from 3.3% to 3.2%, fueling expectations of interest rate cuts by the US central bank.
Global bond markets saw an impact from the US developments, resulting in falling yields and rising share prices. Germany and the UK experienced decreases in government debt yields, with the pound strengthening to around $1.22.
Despite the recent relief, Susannah Streeter, Hargreaves Lansdown's head of money and markets, cautioned that UK borrowing costs remain relatively high: "Government borrowing costs are starting to decline, with 10-year gilt yields dropping, yet they remain above 4.8%, at multi-decade highs, as investors evaluate Britain's debt situation."