Chancellor John Healey faces a fresh headache as global borrowing costs surged in a perfect storm on the bond markets, pushing British government debt yields toward multi-decade highs.
Yields on 30-year UK bonds, known as gilts, rose above 5.85 per cent yesterday, remaining just short of 28-year highs seen earlier this year. At the same time, the Government sold a batch of benchmark ten-year gilts at a yield of up to 5.155 per cent, marking the highest level since 2007.
The sudden surge in borrowing costs will complicate calculations for the new Chancellor of the Exchequer as he prepares to deliver his first Budget in October amid growing public spending pressures.
Mortgage holders received minor relief as official figures showing continued UK jobs weakness eased fears that the Bank of England might implement an interest rate hike in September.
However, the rapid sell-off on bond markets, where yields rise as prices fall, threatens to feed through to higher borrowing costs across the wider economy.
Rising oil prices and geopolitical turmoil
The latest market volatility flared as progress on a deal to end the war with Iran stalled. Bond markets have struggled to recover after taking a hit when the conflict began at the end of February.
US President Donald Trump heightened market jitters after threatening to bomb American ally Oman if it gets in the way of Washington negotiations by attempting to reach its own deal with Iran.
The geopolitical tension pushed oil prices up to $91.89 a barrel, the highest level recorded so far this month, reigniting fears that the war will stoke international inflation.
Global bond sell-off and spending pressures
The turmoil added to a cocktail of worries preoccupying global bond investors, ranging from soaring government debt levels to question marks over the US Federal Reserve under its chairman Kevin Warsh.
Yesterday's global sell-off saw yields on 30-year US Treasuries hit their highest level since 2007 at more than 5.33 per cent, while in Japan ten-year borrowing costs reached a three-decade high of just under 3 per cent.
In Germany, the 30-year Bund yield topped 3.78 per cent, the highest since 2011, while the French 30-year equivalent reached 4.91 per cent, its highest level since 2008.
UK borrowing costs remain the highest among the G7 group of advanced economies and have shown little sign of improvement since Andy Burnham became Prime Minister a month ago.
Markets remain jittery over Prime Minister Burnham's high-spending plans, which include a major council-house building programme, an overhaul of social care, and a boost to the defence budget.
Healey faces a tricky task in paying for Burnham's initiatives, prompting fears that he may impose further punishing tax rises or borrow even more. His task is made harder when rising gilt yields increase the cost of government borrowing.
Market analyst perspective
Experts also pointed to a surge in debt issuance by AI firms to fund their huge expansion plans, which is actively competing for bond investors' money.
Axel Rudolph, chief technical analyst at trading platform IG, said: "Bond markets are facing a perfect storm as inflation worries, rising oil prices, heavy government borrowing and a surge in AI-related debt issuance push long-term yields to multi-decade highs across major economies."
