Key facts
- 10-year UK gilt yields rose to 5.38% on Thursday, approaching a 19-year high.
- Analysts estimate recent yield increases have wiped out over half of the £24bn fiscal headroom built by former Chancellor Rachel Reeves.
- Bank of England Chief Economist Clare Lombardelli warned that persistent high oil prices could necessitate further UK interest rate tightening.
- Yields on 30-year US Treasury bonds surged to 5.444% on Thursday, the highest since 2004.
- The Bank of England held interest rates at 3.75% last week.
A global sell-off in government bonds has intensified upward pressure on UK borrowing costs, complicating the upcoming budget for Chancellor John Healey. The yield on 10-year UK gilts, or interest rates, reached 5.38% by mid-morning Thursday, nearing a 19-year high set last week.
Analysts suggest that recent increases in yields have eroded more than half of the £24bn fiscal "headroom" against Labour's fiscal rules that former Chancellor Rachel Reeves had established in March. Healey has pledged to meet these rules with a "buffer against uncertainty," but it is widely anticipated to be significantly lower than £24bn.
Reaching that level would likely necessitate substantial tax increases or spending cuts. However, Treasury sources indicate the budget will be "focused," with significant spending decisions deferred to a review next year.
Investors across major markets have been selling bonds due to fears of sustained higher inflation and interest rates, exacerbated by the ongoing conflict in the Middle East. Bank of England Chief Economist Clare Lombardelli stated in a speech on Thursday that prolonged elevated oil prices increase the probability of further UK interest rate hikes. She noted that "the longer higher energy prices persist, the greater the risk that indirect effects build and that inflation expectations, wage bargaining and price-setting behaviour begin to adjust in response."
Lombardelli's remarks echoed those of Bank Governor Andrew Bailey, following the Monetary Policy Committee's decision last week to hold interest rates at 3.75%. She emphasized that while high oil prices have had a less significant impact on other prices than initially feared, their persistence raises the risk of entrenched inflation.
As the bond sell-off continued on Thursday, yields on 30-year US Treasury bonds surged to 5.444%, their highest level since 2004. Investors are reportedly concerned about uncontrolled US government spending and, according to some analysts, large-scale bond issuance by AI firms is also impacting demand for Treasuries.