The cost of UK borrowing has reached a 28-year high, triggering concerns that mortgage rates could soon increase. Yields on 30-year UK bonds, known as gilts, surpassed 5.92 percent on Wednesday, the highest point since 1998. Ten-year gilt yields also rose above 5.29 percent, marking their highest level since 2008.
This surge in gilt yields increases the expense of servicing government debt, posing a challenge for Chancellor John Healey ahead of his budget next month and potentially pressuring him to increase taxes. Experts suggest this market volatility could extend to borrowing costs in the wider economy, including mortgage rates offered by banks. This is because swap rates, which influence mortgage pricing, have also climbed, adding to existing financial pressures on households dealing with rising energy and food prices.
Rachel Springall, from financial data provider Moneyfacts, noted that "this does not bode well for borrowers, as lenders use swap rates as a key influence to reprice their fixed-rate mortgages."
Global bond markets have experienced significant turmoil this week, largely fueled by investor concerns about inflation and escalating global debt levels. The ongoing conflict in the Middle East, referred to as Donald Trump's Iran war, is central to these worries, having disrupted energy supplies and showing no immediate signs of resolution. Consequently, oil prices have surged, with Brent crude reaching $97 a barrel, and European natural gas prices climbing to their highest level since 2023.
This inflationary pressure could lead central banks, including the Bank of England, to consider raising interest rates. David Hollingworth, associate director at L&C Mortgages, stated that the market volatility "could have a direct impact on homeowners."
He added, "As market concern grows over whether interest rates will need to climb on the back of higher inflationary pressure, so it becomes more likely that fixed mortgage rates will begin to rise."
Fixed mortgage rates had previously risen earlier in the year following the onset of the Iran war. While they had begun to ease in recent weeks, the current market unrest is expected to halt this trend. If sustained, fixed rates are likely to increase again in the coming days and weeks as lenders adjust their pricing.
The UK, which already faces higher borrowing costs than other G7 nations, has been particularly affected by the recent bond market volatility. Beyond global factors, investors are reportedly apprehensive about how Prime Minister Andy Burnham plans to finance his administration's spending initiatives.
The increased cost of borrowing significantly erodes the approximately £24 billion fiscal 'headroom' identified by former Chancellor Rachel Reeves to meet the government's fiscal rules. This is because current gilt yields are higher than the Office for Budget Responsibility's spring forecast predicted. Julian Jessop of the Institute of Economic Affairs estimated that if gilt yields remain at their current levels, the annual cost of servicing the national debt could increase by up to £8 billion.
Daniel Mahoney, senior UK economist at Handelsbanken, expressed concern that "UK government borrowing costs remain notably higher than G7 counterparts." He further stated, "Current moves in financial markets are clearly set to further erode the Government's fiscal headroom, adding to the likelihood that fresh tax increases will be announced on October 28."