Global bond sell-off raises UK gilt yields to near 19-year high

Analysts say rising yields have erased more than half of chancellor’s fiscal headroom

The yield on 10-year UK government bonds — known as gilts — climbed to 5.38% by mid-morning on Thursday, approaching the 19-year high set the previous week, as a global sell-off in government debt pushed borrowing costs higher ahead of Chancellor John Healey’s budget next month.

Higher gilt yields raise the upfront cost of government investment and feed through into Office for Budget Responsibility forecasts of whether the chancellor is on course to meet Labour’s fiscal rules. Analysts believe the recent increases have wiped out more than half of the £24bn headroom against the rules that former Chancellor Rachel Reeves had built up at the time of the spring statement in March.

Healey, her successor, has repeatedly promised to meet the rules with a “buffer against uncertainty,” but that buffer is widely expected to be significantly lower than £24bn. Rebuilding headroom to that level would likely require large tax increases or spending cuts; Treasury sources told the Guardian the budget will be “focused,” with important spending decisions postponed to a review next year.

Investors across the main markets have been ditching bonds in recent weeks in a wave of selling prompted by fears of higher inflation and interest rates as the conflict in the Middle East continues. The Bank of England’s chief economist, Clare Lombardelli, said in a speech on Thursday that the longer oil prices remained elevated as a result of the war, the more likely UK interest rates would have to rise.

“The longer higher energy prices persist, the greater the risk that indirect effects build and that inflation expectations, wage bargaining and price-setting behaviour begin to adjust in response,” Lombardelli told the conference in Warsaw, Poland. “On that basis, policy is increasingly likely to need to tighten if elevated energy prices persist, absent clear evidence of disinflation or weaker activity.”

Higher UK rates would mean increased mortgage costs for homeowners, at a time when Andy Burnham’s government has promised to offer consumers a “breathing space” against the rising cost of living. The Bank is also expecting a 24% rise in the quarterly energy price cap that determines household utility bills in January if oil prices remain high.

Lombardelli’s message echoed that of Bank Governor Andrew Bailey after the nine-member monetary policy committee left interest rates on hold at 3.75% last week. She stressed that high oil prices had had less impact on other prices across the economy than the Bank had feared, but the longer they remained high, the greater the risk of inflation becoming entrenched.

As the bond sell-off continued to worsen on Thursday, yields on 30-year US Treasury bonds surged to 5.444% — the highest level since 2004. Alongside higher inflation, investors appear to be concerned about the risks of uncontrolled US government spending. Some analysts also suggest large-scale bond issuance by AI firms is undermining demand for treasuries.