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The UK’s long-term borrowing costs have hit their highest level since 1998 as investor worries over the threat of stagflation mount.
The yield on the 30-year gilt touched 5.22 per cent on Tuesday, pushing past a previous peak touched in October 2023 and eclipsing levels reached during the height of the market fallout from Liz Truss’s ill-fated “mini” Budget the previous year.
The new high came after the Treasury paid the steepest borrowing cost this century at an auction of 30-year gilts, as it sold £2.25bn of new debt at a yield of 5.20 per cent.
The strains in the UK market come amid a global sell-off in government bonds in recent months, driven in part by fears that US president-elect Donald Trump’s tariff plans will be inflationary.
Gilt investors have been particularly worried that a mix of anaemic growth and persistent price pressures will push the UK into a period of stagflation, where the Bank of England is constrained from cutting rates to support the economy.
The UK economy contracted for a second straight month in October, and failed to grow in the third quarter.
At the same time, recent data shows continued signs of sticky inflation. Consumer price growth accelerated in November to 2.6 per cent from 2.3 per cent the previous month, prompting investors to pare back their hopes for interest rate cuts in 2025.
“You’ve probably got a bit of a buyer’s strike going on at the moment,” said Craig Inches, head of rates and cash at Royal London Asset Management. He said a combination of a high volume of long-dated gilt sales and “mixed” UK economic data was deterring investors from ultra-long-term debt.
The gilt movements will be a concern in the Treasury, given chancellor Rachel Reeves left herself only a narrow margin of headroom against her revised fiscal rules when she set out borrowing plans in the October Budget.
The Treasury is expecting a fresh round of official forecasts from the Office for Budget Responsibility in March, which will include a new estimate of the amount of wiggle-room the government has against its self-imposed fiscal regime.
Andrew Goodwin of Oxford Economics said he estimated recent movements in yields and rate expectations had erased about two-thirds of the £9.9bn worth of headroom against the chancellor’s key budget rule, which requires her to cover current spending — excluding investment — with tax receipts.
The final headroom forecast will not be determined until closer to the release of the OBR outlook.
“The chancellor took a bit of a gamble in the Budget in leaving so little headroom,” Goodwin said. “There are numerous ways this could go wrong, and gilt yields were one obvious one.”
Business confidence has also taken a knock in the wake of Reeves’ decision to levy a £25bn increase in employer national insurance contributions in the Budget, which coupled with planned increases in the national living wage will drive up labour costs.
