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UK long-term borrowing costs hit their highest level since 1998 on Tuesday as investors fretted over the threat of stagflation.
The yield on the 30-year gilt touched 5.21 per cent, ahead of the auction result of £2.25bn worth of long-dated bonds.
The increase has pushed yields past the previous peak reached in October 2023 and further levels are within reach during the market collapse in Liz Truss's worst “mini” budget in 2022.
Investor concerns about the UK's outlook come amid a global sell-off in government bonds in recent months, driven in part by fears that US president Donald Trump's tax plans will be inflationary.
But gilt investors have become poor more worried that a combination of weak growth and persistent price pressures will push the UK into a period of inflation, where the Bank of England is restricted from cutting rates to support the economy.
“You probably have a consumer strike going on at the moment,” said Craig Inches, head of prices and currencies at Royal London Asset Management. He said a combination of high volume of long-term gilt sales and “mixed” UK economic data was deterring investors from ultra-long-term credit.
The gilt move will be a concern for the Treasury, because Chancellor Rachel Reeves has left herself a narrow margin of leeway against her revised financial rules when setting out lending plans. Budget for October.
The Treasury expects a new round of official estimates from the Office for Budget Responsibility in March, which will include new estimates of the amount the government has against its self-imposed monetary controls.
Andrew Goodwin of Oxford Economics said he estimated that recent moves in yields and expectations had wiped out around two-thirds of the £9.9bn worth of headroom against the chancellor's key budget legislation, which requires him to cover spending current – excluding investments – and tax receipts. .
Final headroom estimates will not be determined until closer to the OBR outlook being released.
“The chancellor took a bit of a gamble on the Budget by leaving a little headroom,” Goodwin said. “There are a lot of ways it could go wrong, and the gilt product was one obvious one.”
Adding to the pressure on the chancellor has been disappointing economic data, including slowing growth figures. The Bank of England at its latest meeting in December forecast zero growth in the last quarter of 2024, after figures showed two consecutive months of small contractions.
Business confidence took a hit after Reeves' decision to impose a £25bn increase in employer national insurance premiums in the Budget, which combined with a planned increase in the national living wage will drive up labor costs.
Meanwhile investors have given up their hopes for a rate cut in 2025 due to persistent signs of inflation. Consumer price growth accelerated in November to 2.6 percent from 2.3 percent in the previous month.