Treasury auctions 30-year gilts at 5.82%, highest yield since 1998

OBR forecast expected to cut Reeves’s £24bn fiscal headroom

The UK Treasury paid 5.82% to borrow £4bn at a 30-year bond auction on Tuesday, the highest rate for that maturity since the Debt Management Office was established in 1998. The auction took place the same day Bank of England Governor Andrew Bailey told a parliamentary committee that recent increases in oil prices were adding to inflationary pressure.

Higher gilt yields are expected to wipe out at least half of the £24bn fiscal headroom former chancellor Rachel Reeves built at her spring forecast in March. The Office for Budget Responsibility’s next forecast, due before Chancellor John Healey’s October 28 budget, is expected to reflect the higher borrowing costs.

In a speech in Coventry on Monday, Healey said he was determined to balance the books. The Treasury auction came amid a broader sell-off in long-dated government debt across major economies, with investors weighing concerns about a possible rise in inflation after the resumption of Middle East conflict increased oil prices, and about risks from rising public debt.

Appearing before the Commons Treasury select committee on Tuesday, Bailey said the recent rise in oil prices was putting pressure on inflation and interest rates. “The risks, I’m afraid, are on the upside,” Bailey said. “And that’s really the risks coming from energy prices.”

Bailey said there was no secret plan to raise interest rates, and noted that higher borrowing costs had already had an impact on consumers without the Bank having to take action. “UK mortgage rates now are typically at the moment about a three-quarters of a percent higher than they were at the point when the conflict broke out,” Bailey said. “I think with the possible exception of Japan, although that’s a little hard to map, that’s the largest increase in mortgage rates in the G7.”

Brent crude was trading at about $97 a barrel on Tuesday. Bailey said the oil price could rise further, noting that the Strait of Hormuz remains largely closed to tanker traffic and that Ukraine has been attacking refineries in Russia.

Bailey appeared alongside three fellow members of the Bank’s monetary policy committee, which will meet next week to set interest rates. Megan Greene, who was in the minority voting for a rate rise in July, said she remained concerned about the risks of acting too late against inflation. Dave Ramsden and Alan Taylor, who did not back a rate rise in July, said prices had risen less than feared as a result of the Iran war.