UK Borrowing Costs Surpass 6% as Global Bond Market Rout Intensifies
Yields on 30-year gilts reach their highest point since 1998, signaling investor unease and potentially squeezing government finances.
Britain has become the first G7 economy to see its borrowing costs exceed 6% since the eurozone crisis, as a global bond market rout pushed yields on its 30-year gilts to their highest level since 1998.
The surge in gilt yields, which indicates that investors are demanding more to lend to the UK government, reached 6.03% on Thursday. This marks a significant increase from September 2012, when Italian 30-year debt last traded above 6%, at a time when UK borrowing costs were approximately half that rate.
The turmoil in the bond market also affected global stock markets, with the FTSE 100 index falling by 1.7% in early trading. Yields on 10-year gilts also climbed above 5.5%, a 19-year high.
Investors' concerns have been heightened by the ongoing Iran war, which has driven up oil and gas prices, fueling inflation fears and worries about government debt. Hopes for a resolution to the conflict have diminished in recent weeks, exacerbating these anxieties.
Economists estimate that Chancellor John Healey's fiscal headroom, a buffer against meeting government borrowing targets, has shrunk significantly ahead of the upcoming budget. This could reduce the funds available for essential spending areas such as defense, social care, and cost-of-living support.
Susannah Streeter, chief investment strategist at Wealth Club, noted that the bond market is increasing pressure ahead of the UK Budget. "With debt already high and interest payments eating up a hefty chunk of public finances, sustained yields at these levels could further squeeze the Chancellor’s wiggle room when he sets out his spending plans," she said.
The rise in gilt yields also impacts wider borrowing costs, including mortgages. Recent data shows a jump in average two-year fixed mortgage rates, adding to household expenses. Experts warn that continued market turmoil could lead to further increases for mortgage borrowers.
The phenomenon is often described as "bond vigilantes" at work, where investors express a loss of confidence in a government's fiscal policy by selling bonds, driving up yields and increasing borrowing costs.