Global bond sell-off hits UK borrowing costs ahead of budget

The global government bond sell-off resumed on Wednesday, driving up the UK’s borrowing costs and exacerbating the challenges facing John Healey as he prepares his first budget.

The yield – effectively the interest rate – on 10-year UK government bonds, or gilts, jumped to just below 5.3% in early trading: its highest level since mid-2008.

Investors across major markets have been dumping bonds in recent days amid fears about inflation and spiralling deficits.

Global inflation fears have intensified since the US and Iran began exchanging fire again at the weekend, pushing up the oil price and increasing expectations that central banks will have to raise interest rates in the coming months.

Higher bond yields progressively increase the cost of financing the government’s debt. UK analysts have warned that higher gilt yields since the start of the Iran war have potentially wiped out almost half of Healey’s headroom against the government’s fiscal rules.

Economists at Deutsche Bank reckon the £26bn room for manoeuvre Rachel Reeves created at her spring forecast could be down to less than £14bn by the time of the 28 October budget.

Healey would then have to decide whether to rebuild the margin for error with tax increases or spending cuts – alongside facing pressure to fund higher defence spending.

Chris Beauchamp, the chief market analyst at IG, said: “Governments around the world are feeling the pressure from bond markets, but the situation is particularly acute for the UK, where Andy Burnham’s grand promises about reforming the economy are about to meet the cold reality of high debt levels and rocketing borrowing costs.”

The Brent crude oil benchmark is currently hovering at about $95 a barrel amid renewed fighting in the Middle East. The US launched new airstrikes on Iranian targets overnight, prompting counterstrikes by Tehran targeting American interests in Gulf allies.

The resumption of the sell-off in UK markets came after Asian stock markets fell sharply. In Tokyo the Nikkei 225 share index slumped by 2.85%. China’s CSI 300 lost 1.4%, while South Korea’s Kospi dropped by 3.3%.

Investors have also been rattled in recent days by the US administration’s attempts to interfere in financial markets – including helping the Japanese to prop up the value of the yen and buying back more US government bonds, or treasuries, to rein in rising yields. Neither move appears to have been successful.