The UK is facing higher borrowing costs ahead of the upcoming budget, as a global bond sell-off pushes government bond yields towards recent highs. The yield on 10-year UK bonds, known as gilts, had risen to 5.38% by mid-morning on Thursday.
That figure brings the yield close to the 19-year high set last week. Higher yields make government borrowing more expensive, adding pressure at a time when recent increases have already reduced the financial room available against the UK’s borrowing rules.
Rising yields reduce the budget headroom
The latest moves have wiped out more than half of the £24bn “headroom” that former chancellor Rachel Reeves had built up against the rules at the time of the spring statement in March. That leaves less room between the government’s position and the limit it set for its borrowing plans.
The change matters because the budget is approaching while bond yields remain high. A yield of 5.38% on 10-year gilts means the cost attached to government borrowing has moved higher, and the climb towards last week’s 19-year peak adds to the pressure facing the UK.
The bond market move has come alongside a rise in the amount the UK government borrowed. The government borrowed £18.3bn last month, compared with £18bn in August. Official figures showed that August borrowing was £2.9bn higher than expected.
These figures put borrowing and borrowing costs at the centre of the run-up to the budget. The government is dealing with both a larger monthly borrowing figure and a smaller amount of headroom than it had at the time of the spring statement in March.
Global bond pressure reaches the UK
The sell-off has not been limited to UK government debt. Yields on 30-year US Treasury bonds surged to 5.444%, the highest level since 2004. The move shows that borrowing costs have also climbed across the Atlantic as the global bond market comes under pressure.
Longer-term bonds are important because their yields reflect the cost of borrowing over many years. In the UK, the rise in 10-year gilt yields to 5.38% has taken place alongside the jump in 30-year US Treasury yields, creating a wider backdrop of higher borrowing costs before the budget.
Energy prices and inflation are also part of the wider concern. Clare Lombardelli, the Bank of England chief economist, said: “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.”
Her warning connects prolonged energy price increases with changes in inflation expectations, wage bargaining and price-setting behaviour. Those pressures matter for interest rates and borrowing costs because they can make it harder for inflation to move back down.
Lombardelli also said: “The longer oil prices remained elevated as a result of the war, the more likely it was that UK interest rates would have to rise.” Her comments set out the link between sustained oil prices and the possibility of higher UK interest rates.
What the figures mean before the budget
The government now goes into the budget with the 10-year gilt yield near a 19-year high, monthly borrowing above expectations in August and more than half of the £24bn headroom removed by higher yields. Each figure points to a tighter financial position than the one available at the time of the spring statement in March.
The UK borrowed £18bn in August, while the government borrowed £18.3bn last month. The official August figure was £2.9bn higher than expected, adding to the focus on how much the government is borrowing as the budget approaches.
At the same time, the 30-year US Treasury yield reached 5.444%, its highest level since 2004. That global move matters for the UK because the current rise in gilt yields is part of a broader bond sell-off rather than an isolated change in British borrowing costs.
The numbers leave the upcoming budget facing a difficult backdrop. Higher gilt yields have reduced Rachel Reeves’s former £24bn headroom, while the UK’s borrowing figures and the global rise in bond yields keep pressure on the government’s finances.
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