Key facts
- 10-year UK government bond yields reached 5.515% on Thursday, a 19-year high.
- Yields on 20- and 30-year UK government bonds also hit multi-decade highs.
- Global bond markets are experiencing a selloff driven by inflation fears and soaring oil prices.
- The UK's fiscal buffer may have been reduced by half due to rising borrowing costs and a weaker growth outlook.
- IMF Managing Director Kristalina Georgieva urged governments to take necessary policy actions.
Medium-term borrowing costs for the UK government surged to a 19-year high on Thursday as investors continued to sell off global bonds amid concerns over rising inflation and government spending.
The yield on 10-year UK government bonds, or gilts, climbed 0.06 percentage points to 5.515% by lunchtime in London, marking the highest level since July 2007. Yields on 20- and 30-year gilts also rose significantly, reaching their highest points since 1998.
These rising borrowing costs, coupled with a weaker growth outlook, are expected to have significantly eroded the fiscal buffer built by former Chancellor Rachel Reeves. Economists anticipate that Chancellor John Healey may need to increase taxes in his upcoming budget on October 28 to rebuild this cushion and fund policy interventions like the six-month VAT cut on electricity bills and an energy support package.
However, some economists, such as Andrew Wishart of Berenberg Bank, caution against excessive tax increases, arguing it could harm economic incentives. Wishart believes gilt yields may decrease over the next year as the Bank of England is likely to implement fewer rate hikes than the four currently anticipated by investors.
The global bond selloff has intensified recently, with oil prices soaring and no clear resolution to the Middle East conflict. Investors are reportedly anxious about persistent inflation and what they perceive as runaway government spending. France has been particularly affected as it navigates its own budget, but the trend is widespread across major economies.
Kristalina Georgieva, managing director of the International Monetary Fund (IMF), has called on economic policymakers worldwide to take necessary actions to address rising bond yields, ahead of the IMF's annual meeting.