The UK’s long-term government borrowing costs have soared to their highest level since 1998, putting immense pressure on Chancellor Rachel Reeves ahead of the autumn budget. The yield on 30-year government bonds, known as gilts, jumped to 5.698% on Tuesday, marking a significant increase and signaling growing investor anxiety over the UK’s public finances.
This surge in borrowing costs, which makes it more expensive for the government to raise money, comes at a critical time for the Treasury. It exacerbates a fiscal “black hole” estimated to be as large as £51 billion, which the Chancellor is tasked with addressing. The rise in gilt yields compounds this challenge by increasing the cost of servicing the UK’s national debt, which is currently around 96.1% of GDP.
The sharp increase in yields is driven by a combination of domestic and global factors. While government bonds globally have been under pressure, the UK is facing particular home-grown challenges. Analysts suggest that a key driver is a loss of confidence among international investors in the government’s ability to manage its fiscal policy. This is compounded by recent failures to curb welfare spending and a general sense that the country is caught in a “doom loop” of sluggish growth and deteriorating public finances.
Another major factor is the Bank of England’s strategy of quantitative tightening, which involves actively selling off government bonds. This reversal of the previous policy of quantitative easing is happening more aggressively in the UK than in other major economies, putting further upward pressure on yields. Concerns over persistent inflation in the UK also play a role, as higher inflation is likely to keep official interest rates elevated for a longer period, adding to the cost of the government’s inflation-linked debt.
The consequences of these rising borrowing costs extend beyond government balance sheets. While the increase in yields only affects the cost of new borrowing, it has a ripple effect across the economy. The turmoil in the bond market can lead to instability in other areas, as seen during the mini-budget crisis of 2022 when a gilt sell-off prompted a panic in the mortgage market.
A weaker pound, which tumbled on Tuesday in tandem with the bond sell-off, could also fuel inflation by making imports more expensive. For the average person, this could lead to a higher cost of living. The increased cost of government debt also means that the Chancellor will face an even greater challenge in the upcoming autumn budget, with the Office for Budget Responsibility (OBR) likely to revise its forecasts. This could force the government to make even more difficult decisions regarding tax hikes or spending cuts to balance the books, further impacting households and businesses.
The recent spike in yields, coming after a challenging summer for the government, underscores the urgent need for a credible fiscal plan to restore market confidence and stabilize the UK’s public finances.