Britain is facing its highest long-term borrowing costs in more than 28 years as a global bond sell-off pushes gilt yields higher and leaves Chancellor John Healey with less room for manoeuvre ahead of next month’s Budget.
The yield on 30-year UK government bonds stood at 5.83 per cent on Tuesday, its highest level since May 1998, as investors demanded greater compensation for holding long-dated government debt.
The Treasury is due to raise billions of pounds from investors on Tuesday through a sale of long-term gilts, potentially making it the most expensive syndicated government debt issue since the Debt Management Office was established in 1998.
The government is selling additional amounts of a gilt maturing in January 2056. The bond was initially issued in May 2025, when investors were offered a yield of 5.405 per cent. The latest sale will add to £5.9bn of debt already issued under the bond.
Megum Muhic, a strategist at RBC Capital Markets, said the latest sale could raise as much as £5bn.
If yields remain around current levels, the transaction would carry the highest borrowing cost for a syndicated gilt since the DMO began operations.
The pressure on UK government debt reflects a broader deterioration in global bond markets. Investors are concerned that higher energy prices could fuel another bout of inflation, while rising government deficits have increased the supply of debt that markets must absorb.
A surge in corporate borrowing by companies involved in the artificial intelligence boom has added to concerns about the overall volume of debt being issued.
UK gilts have been particularly weak, with British government bond yields rising faster than those of any other G7 economy in recent weeks. Uncertainty over the government’s tax and spending plans has added to the pressure.
Britain is not alone in confronting higher borrowing costs. The US last month sold 30-year Treasuries at their highest interest rate since 2001, while Germany recently paid its highest borrowing cost on a syndicated bond sale since 2011.
The UK’s borrowing costs have also risen sharply in the inflation-linked market. Last week, the government sold £900mn of 25-year index-linked gilts at a record yield of 2.496 per cent.
The increase in gilt yields presents an additional challenge for Healey as he prepares for his October 28 Budget. Higher borrowing costs increase the cost of refinancing existing debt and can quickly erode the fiscal headroom available to the government.
Bloomberg Economics estimates that the government’s room for manoeuvre under its fiscal rules has fallen by half from the £23.6bn buffer available in the spring, leaving roughly £12bn.
Healey has promised to use the Budget to address financial pressures on households and businesses while also imposing tighter controls on public spending.
In his first major speech as chancellor on Monday, he promised to be “honest” about the need to rein in public expenditure.
He said: “Fiscal discipline underwrites every promise this government makes.”
The chancellor has nevertheless declined to rule out tax increases to close a potential fiscal gap that economists have estimated could reach £19bn.
The Resolution Foundation has warned that unfunded spending commitments, combined with the economic consequences of the Iran war, have significantly reduced the government’s room for manoeuvre.
The deterioration in the fiscal position comes against a backdrop of steadily higher public debt. Britain’s public sector net debt has risen from about 85 per cent of gross domestic product in the 2019-20 financial year to just over 94 per cent at the end of July, according to the Office for National Statistics.
That is the heaviest debt burden since the 1960s.
Debt servicing costs are already absorbing a significant share of government spending. Interest payments reached £7.7bn in July alone, while House of Commons Library figures show that eight pence of every pound spent by the government went towards servicing debt during the 2025-26 financial year.
The annual cost of servicing government debt has now risen above £100bn, with inflation adding further pressure through its effect on index-linked liabilities.
The rising cost of government borrowing also puts renewed focus on warnings made by Prime Minister Andy Burnham before he entered Downing Street.
Mr Burnham said last September that Britain should not be “in hock to the bond markets.”
Since becoming prime minister in July, however, he has committed his government to maintaining its fiscal rules while seeking “flexibility”.
The combination of elevated gilt yields, weaker fiscal headroom and persistent pressure for additional public spending leaves the government facing a delicate balancing act: convincing investors that the public finances remain under control while finding enough money to meet its political commitments.
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