The government sold a new ten-year gilt at a yield of 5.155 per cent on Tuesday, the highest interest rate attached to ten-year borrowing since August 2007, as a global bond sell-off gathered pace amid concerns over inflation and persistently high public borrowing.
The same debt was sold at a yield of 5.04 per cent only last month. The rise reflects a broader increase in government bond yields worldwide as investors weigh the risk that the war in the Middle East keeps inflation higher for longer by leaving the Strait of Hormuz effectively shut.
The sale comes as the prime minister, Andy Burnham, and the chancellor, John Healey, weigh their tax and spending plans ahead of the budget on 28 October.
Debt interest spending is on track to exceed £100 billion a year until the early 2030s, according to the Office for Budget Responsibility. Economists have said the government’s fiscal headroom has been more than halved to about £10 billion, in part because of higher gilt yields in the run-up to the 28 October budget.
Burnham has announced a series of measures aimed at easing the cost of living for families, including a cap of £2 on most single bus journeys in England, at a time of squeezed public finances and rising prices.
Inflation is expected to gather pace in the second half of the year. Official figures due on Wednesday are forecast to show consumer price inflation rose to 2.9 per cent in July from 2.6 per cent in June. Investors continue to price in the possibility that the Bank of England will raise interest rates to deal with price pressures, particularly if the Gulf conflict escalates further.
On Friday the Office for National Statistics is expected to report that government borrowing has exceeded the OBR’s forecasts since the fiscal year began in April.
Long-dated bonds have seen the heaviest selling in recent days, a signal of investor concern about persistent government borrowing, elevated debt-to-GDP ratios and still-high oil prices.
UK 30-year gilt yields rose by 0.04 percentage points to 5.86 per cent on Tuesday, close to the post-1998 peak they reached during the early stages of the US-Iran war, when long-term borrowing costs hit a 27-year high.
The yield on the 30-year US Treasury reached 5.33 per cent on Tuesday, its highest level since 2007, while the German equivalent hit a 15-year high of 3.78 per cent. Yields move inversely to prices.
Economists unaffiliated with either US political party have suggested the country’s debt-to-GDP ratio could exceed its post-Second World War high of 106 per cent within a decade. The US debt stock has almost reached $40 trillion.
Japanese long-term government borrowing costs also rose to a near record high on Tuesday as the Bank of Japan prepares to raise interest rates before the end of the year.
Some market participants have pointed to the volume of bond sales by the world’s largest technology companies, which are raising cash for investment in artificial intelligence infrastructure, as a further factor pulling long-term government yields higher.
An increase in the supply of bonds typically pushes yields up and prices down in order to give investors enough incentive to buy the additional debt, adding to the repayment burden on the companies and governments that issue it.
Oil prices edged higher on Tuesday, with Brent crude, the global benchmark, up 0.63 per cent at $91.16 a barrel and WTI, the US benchmark, up 1.35 per cent at $85.64. Gold slipped 0.4 per cent to $4,400 an ounce.
