The UK’s long-term borrowing costs surged on Tuesday, marking the highest level since 1998. This sharp rise in gilt yields highlights growing economic and political concerns that are dampening investor confidence in British government debt.
The yield on 30-year gilts — long-term UK government bonds — climbed to 5.212%, a level not seen in nearly three decades. The increase followed an auction by the UK Debt Management Office, which issued £2.25 billion ($2.83 billion) worth of 30-year gilts with a coupon rate of 4.375%. The bonds were sold at a minimum yield of 5.194%, indicating a discount on their face value.
Yields across shorter-dated gilts also rose. The yield on 20-year gilts increased to 5.153%, while the 10-year gilt yield rose to 4.641%. These movements reflect a broader trend of investor caution, with gilt yields climbing sharply in recent weeks.
Economic Stagnation and Inflationary Pressures
The surge in borrowing costs comes against the backdrop of mounting economic difficulties in the UK. The British economy contracted unexpectedly by 0.1% in October, raising fears of stagnation. Simultaneously, inflation remains above the Bank of England’s 2% target, with November’s figure edging up to 2.6%.
Susannah Streeter, head of money and markets at Hargreaves Lansdown, highlighted the difficult environment in comments. “In the UK, there is particular concern brewing about stagflation taking hold, given that inflation has been creeping up and pay growth is still hot, while the economy has been stagnating.”
The term “stagflation” refers to the toxic combination of stagnant economic growth, high unemployment, and rising inflation — a scenario that is particularly challenging for policymakers to address.
Political Uncertainty Adds to Investor Caution
Adding to economic woes, political uncertainty is weighing heavily on market sentiment. Concerns over the Labour government’s fiscal policies have left businesses and investors on edge. The government recently announced plans to raise taxes by £40 billion ($50.1 billion), including a controversial hike in employer National Insurance payments. Businesses have warned that such measures could stifle hiring and economic growth.
The British Chambers of Commerce reported on Monday that business confidence has fallen to its lowest level since the UK’s mini-budget crisis in 2022. Rising tax costs, coupled with wage pressures, are creating a challenging environment for many firms.
Global Factors at Play
The UK’s difficulties are compounded by global economic pressures. Susannah Streeter noted that traders are wary of potential inflationary impacts from U.S. President-elect Donald Trump’s proposed tariff policies. These measures could push up the value of the dollar, U.S. interest rates, and consumer prices, spilling over into international markets.
Investor Sentiment and Public Finances
The rise in gilt yields reflects a decrease in investor appetite for UK government bonds, particularly long-term debt. Richard Carter, head of fixed interest at Quilter Cheviot, told that the government’s rising borrowing costs are “bad news” as they stoke fears about the state of public finances.
However, Carter also pointed out that current gilt yields offer opportunities for certain investors. “Gilt yields nevertheless present an attractive opportunity for long-term investors, thanks to being well above expected inflation levels,” he said. For those with a lower risk appetite, short-dated gilts may be a safer option, as they are less sensitive to market fluctuations.
A Challenging Road Ahead
The combination of economic stagnation, rising inflation, and political uncertainty paints a challenging picture for the UK. As borrowing costs continue to rise, concerns about the state of public finances and the broader economy are likely to persist. For investors, the gilt market may offer opportunities, but it remains a highly uncertain environment in the face of both domestic and global pressures.
↔ 
↔ 
↔ 
↔ 
↔ 
↔ 
↔ 
↔ 
↔ 
↔ 
→ 
→ 
→ 
→ 
→ 
→ 
→ 
