UK government borrowing costs have reached their highest level since 2008, with the yield on 10-year gilts hitting 5% at the close of trade on Friday. The rise came as financial markets now expect up to three interest rate rises in 2026, following the Bank of England's decision to hold rates at 3.75% and hint at future increases.
The higher yields create a headache for Chancellor Rachel Reeves, pushing up the cost of servicing the national debt. The move was compounded by a higher-than-expected monthly deficit of £14.3bn in February, up £2.2bn on the same month last year, according to the Office for National Statistics (ONS).
Stock markets also slid amid fears of an escalation in the Iran conflict, with the FTSE 100 falling 1.44% to close below 10,000, erasing all its gains in 2026. Germany's DAX and France's CAC also fell, while the pound dropped nearly 1% against the dollar to $1.3316.
Kathleen Brooks, research director at XTB, warned that 'bond vigilantes are after the UK once more', urging the government to be cautious about promises on energy subsidies. Analysts fear higher energy prices, inflation and interest rates from the Middle East conflict could jeopardise the £23bn headroom Reeves left against her fiscal rules.
Despite the setback, total borrowing for the 11 months to February stood at £125.9bn, on course to undershoot the Office for Budget Responsibility's full-year estimate of £138.3bn. The government maintains its tax increases and measures to control inflation have strengthened the economy.
