UK gilt yields have hit a 27-year high as investor unease around government finances intensifies ahead of the Autumn Budget.
The yield on 30-year government bonds reached 5.73% on Tuesday, the highest level since May 1998.
The lack of confidence in the Treasury means that investors are demanding a higher return to lend to countries with heavy borrowing needed.
Neil Wilson, investor strategist at Saxo UK, said: “The market move was a sign that investors do not have confidence the Treasury will stick to its strict borrowing rules. 30-year yields at their highest in almost three decades is not a good look for the Labour Government and underscores that there is little fiscal or economic credibility left.”
Higher borrowing costs for the State mean it becomes more expensive to finance existing debt and harder to fund new spending. For the public, this is likely to translate into tougher fiscal choices for the Government, says Richard Carter, head of fixed interest research at Quilter Cheviot.
“This only adds to the headache facing Rachel Reeves as she prepares her second budget, with markets making clear that borrowing to fill the black hole in the public finances will be difficult and may ultimately point to further tax rises.”
Lale Akoner, global market analyst at eToro, said for investors, the rising gilt yields pose a “double-edged” signal.
“On one hand, elevated yields offer an attractive entry point into UK sovereign debt, especially for institutions seeking long-duration assets with reliable income.
“The fact that demand was more than 10x oversubscribed suggests gilts are firmly back on the radar as a yield play. Strong demand shows that gilts remain attractive as yields near multi-decade highs, offering compelling returns versus global peers.
“On the other hand, the sharp rise in borrowing costs reflects concerns about fiscal sustainability and inflation risk, which could keep yields volatile. For the Government, this creates a paradox: market confidence in UK debt is robust, but financing that debt is increasingly expensive, constraining budget flexibility and raising the stakes for fiscal discipline ahead of the Autumn Budget.”
Chris Beauchamp, chief market analyst at IG, added: “Bond investors do seem to be sending a message to the UK Government, one that Westminster has been aware of for some time.
“Only when the ten-year shoots higher should we really start to worry, and for now the Government has the breathing space to take another hard look at the public finances – a combination of taxation and spending cuts remains the only way to retain credibility.”
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