UK 10-year gilt yield hits 19-year high amid global bond selloff

Healey faces 28 October budget as economists warn £24bn buffer may be halved

The yield on 10-year UK government bonds had jumped 0.06 percentage points by lunchtime in London on Thursday, to 5.515%, the highest level since July 2007, when the global financial crisis was beginning to unfold. Yields on 20- and 30-year UK government bonds, which are known as gilts, had also risen significantly, to their highest level since as long ago as 1998. Yields rise when bond prices fall.

The bond selloff has intensified across big economies in recent days as oil prices have soared, with no resolution of the Middle East conflict in sight. Investors appear to be anxious about higher inflation and runaway government spending. France has been hardest hit, as Paris battles to pass a budget, but the selloff has been widespread. The US 10-year Treasury yield stood at 5.27% on the same day, according to Federal Reserve data, underscoring the breadth of the global rise in long-term borrowing costs.

Recent dramatic moves in government bond markets have been driven by international factors but will increase the pressure on Healey ahead of his first budget as chancellor on 28 October. Economists believe rising borrowing costs and a weaker growth outlook are likely to have wiped out around half of the £24bn buffer against Labour’s fiscal rules that Healey’s predecessor, Rachel Reeves, built up at the time of her spring statement in March – perhaps significantly more.

Healey is expected to raise taxes at the budget to partly rebuild that cushion, as well as paying for policy interventions including the six-month VAT cut on electricity bills and a modest energy support package for the poorest households.

Some economists are warning the chancellor not to go too far in rebuilding the Treasury’s headroom, however. Andrew Wishart, of Berenberg Bank, said: “Raising taxes to keep the surplus close to the size it was in the March forecast (ie to ‘maintain the headroom’) would do unnecessary damage to economic incentives.” Wishart argues that gilt yields are likely to come back down over the next year, with the Bank of England likely to make fewer rate rises than the four that investors currently expect.

The Bank of England is widely expected to raise interest rates at its November meeting to tackle surging inflation, echoing moves already made by the European Central Bank, the Federal Reserve and the Bank of Japan.

Kristalina Georgieva, managing director of the International Monetary Fund, has urged governments to tighten their belts in response to rising bond yields. “My message to the world’s economic policymakers will be this: we cannot keep delaying necessary policy action – you have the tools, now have the wisdom to use them,” she said, ahead of next week’s IMF annual meeting in Bangkok.

Higher yields not only push up costs for indebted governments, but have knock on effects for borrowers across the economy, including homeowners and businesses. US Treasury Secretary Scott Bessent has tried to rein in yields on the US’s long-term debt by increasing buybacks of treasuries, but the policy appears to have had little impact. Yields on 30-year treasuries targeted by Bessent’s policy stood at about 5.235% when he announced the doubling of buybacks in August, but have since surged above 5.7%.