Britain's long-term borrowing costs have climbed to their highest level in 27 years, intensifying pressure on Chancellor Rachel Reeves ahead of the autumn budget. The yield on 30-year UK government bonds reached 5.723% on Tuesday, surpassing the previous high of 5.649% set in April and marking the steepest level since 1998.
The rise in yields, which increase when bond prices fall, reflects a global sell-off in long-term government bonds driven by rising inflationary expectations. The pound also weakened, falling 1.8 cents against the US dollar to $1.3365, its worst day since early April. Analysts say the market is demanding higher returns to lend to the UK government amid concerns over fiscal sustainability.
The higher borrowing costs eat into the Treasury's limited fiscal headroom, potentially forcing Reeves to consider tax increases or spending cuts to meet her fiscal rule of reducing debt within five years. Capital Economics estimates the chancellor may need to raise £18-28bn in the autumn budget, mostly through higher taxes, to maintain a buffer of £9.9bn.
Market commentators have expressed scepticism about the government's ability to control spending. Mark Dowding of RBC BlueBay Asset Management noted that gilt yields have risen due to doubts that tax increases will resolve structural issues, particularly welfare expenditure, which remains on an unsustainable path. Kathleen Brooks of XTB suggested that a threat to Reeves's position could be weighing on bonds, as markets fear a shift towards more borrowing instead of tax rises. Marcus Jennings of Schroders added that a flurry of potential tax policies, such as a new levy on home sales above £500,000 or applying national insurance to landlords' rental income, has highlighted the UK's challenged fiscal position.
The bond sell-off coincided with a flight to safety that pushed gold prices to a record high of $3,508 an ounce. As Prime Minister Keir Starmer reshuffled his team, including putting Treasury chief Darren Jones in charge of delivery, the market remains focused on whether the government can present a credible plan to manage public finances.
