Britain’s borrowing costs have surged to levels not seen in decades, as the escalating conflict in the Middle East and renewed energy price shock trigger a sharp sell-off in government bonds and threaten to disrupt Chancellor John Healey’s plans for his first Budget.
Gilt yields have risen sharply this week as investors reassess the outlook for inflation and interest rates following the latest escalation in the geopolitical crisis. The move has been particularly pronounced in the UK, raising fresh concerns about the sustainability of the government’s fiscal position and the cost of servicing its debt.
On Thursday, the two-year gilt yield jumped 14 basis points to 4.72 per cent. The benchmark 10-year yield climbed 10 basis points to 5.3 per cent, while the 30-year yield rose six basis points, moving towards 6 per cent — a level last reached in 1998.
Kathleen Brooks, research director at XTB, said: “Although the move higher in bond yields is a global phenomenon caused by an energy price shock, the fact that UK bond yields are rising at a faster pace than elsewhere, suggests that there is a specific risk premium attached to UK debt right now.
The divergence has heightened scrutiny of Britain’s finances at a time when the government is already facing difficult choices over taxation, public spending and debt interest costs.
The latest pressure has been driven in part by oil prices. Brent crude, the international benchmark, rose above $100 a barrel on Wednesday for the first time since July, gaining almost 4 per cent in a single session.
A prolonged period of elevated energy prices could complicate monetary policy by keeping inflation higher for longer, potentially limiting the ability of the Bank of England and Federal Reserve to reduce borrowing costs.
Brooks warned that if oil prices continued to rise into triple-digit territory, “this would transform next month’s Budget into an emergency Budget to plug fiscal holes.
She added: “Tax rises under the Labour government are nothing new, but Healey and co. may also be forced into huge welfare cuts to bring borrowing down and pay the debt interest bill.
“Andy Burnham may have tried to protect welfare spending this week, but his hopes and dreams are meeting the reality of the bond vigilantes who keep pushing UK yields to multi-year highs.
Healey has so far provided few details about his inaugural Budget, scheduled for October 28, while declining to rule out further tax increases.
That has left investors increasingly focused on whether the government will need to take additional measures to reassure markets should borrowing costs remain elevated.
Attention will now turn to economic data due later this week, including UK growth figures and US inflation statistics. Investors will be watching for evidence that higher energy costs are beginning to weigh on economic activity while simultaneously adding to inflationary pressures.
For Healey, the combination presents a particularly difficult fiscal dilemma: weaker growth could reduce tax revenues just as higher gilt yields increase the cost of servicing Britain’s debt.
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