UK 10-Year Gilt Yields Hit 18-Year High Ahead of October Budget
UK 10-year gilt yields touched 5.268%, an 18-year high, as global sell-off and Iran war fears raise debt costs, squeezing fiscal headroom to £13 billion.
British government borrowing costs climbed to their highest level in nearly two decades on Wednesday, intensifying the fiscal squeeze on Chancellor John Healey ahead of his first budget on October 28.
The yield on 10-year gilts rose to 5.268% shortly after 0700 GMT, its strongest since June 2008. The move added about 4 basis points on the day, following a 15-basis-point jump on Tuesday. Shorter-dated debt also rose, with five-year gilt yields reaching their highest since October 2023 at 4.7534%.
The increase tracks a broader sell-off in European government bonds, driven by investor concerns over the inflationary impact of rising oil prices after the latest escalation of the Iran war. While the move is largely in line with other European markets, it lands at a sensitive moment for the new administration of Prime Minister Andy Burnham.
Economists at Pantheon Macroeconomics noted that the jump in gilt yields has sharply reduced the Chancellor's margin for error on the government's fiscal targets. Higher interest costs have cut fiscal headroom to approximately £13 billion ($18 billion), down from £23.6 billion in the Spring Statement.
"The Chancellor needs to raise taxes or reduce spending by £11 billion per year just to get the thin margin of headroom back to where it was," they said in a note to clients. "Markets will be on edge as the budget approaches and the government keeps making spending commitments."
The rising debt servicing costs underscore the challenge facing Healey as he balances spending pledges against market expectations for fiscal discipline.