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Long-term UK borrowing costs have hit their highest level since 1998 as investors worry about the threat of stagflation.
The yield on 30-year gilt touched 5.22 percent on Tuesday, surpassing the previous peak reached in October 2023 and eclipsing levels reached during the height of the market’s decline since Liz Truss’ ill-fated “mini” budget the previous year.
The new record came after the Treasury paid the biggest borrowing cost this century at an auction of 30-year securities, as it sold £2.25bn of new debt at a yield of 5.20 per cent.
The tensions in the UK market come amid a global sell-off in government bonds in recent months, fueled in part by fears that US President-elect Donald Trump’s tariff plans will be inflationary.
Gilded investors were especially concerned that a mix of anemic growth and sustained price pressures will push the UK into a period of stagflation, where the Bank of England is forced to cut rates to support the economy.
The UK economy shrank for the second consecutive month in October and failed to grow in the third quarter.
At the same time, recent data show continued signs of sticky inflation. Consumer price growth accelerated to 2.6 percent in November from 2.3 percent in the previous month, prompting investors to lower hopes for a rate cut in 2025.
“You probably have a buyer strike right now,” said Craig Inches, head of rates and cash at Royal London Asset Management. He said the combination of a large amount of long-term gilt selling and “mixed” UK economic data was deterring investors from ultra-long-term debt.
Gold developments will be a cause for concern at the Treasury, given that Chancellor Rachel Reeves left little room for her revised fiscal rules when she set out borrowing plans in Budget for October.
The Treasury expects a new round of official forecasts from the Office for Budget Responsibility in March, which will include a new assessment of the amount of wiggle room the government has against its self-imposed fiscal regime.
Andrew Goodwin of Oxford Economics said he estimated that recent movements in yields and expected rates had wiped out around two-thirds of the £9.9 billion of headroom against the chancellor’s key budget rule, which requires her to cover current spending – excluding investment – tax receipts.
The final space forecast will not be determined until closer to the release of the OBR perspective.
“The chancellor took a bit of a gamble with the budget by leaving so little room,” Goodwin said. “There are a number of ways this could go wrong, and gilt yields were one obvious one.”
Business confidence has also been dented by Reeves’ decision to budget for a £25bn increase in Employers’ National Insurance contributions, which, along with a planned rise in the minimum wage, will increase labor costs.
