The cost of long-term government debt soared to its highest level since 1998 on Tuesday, as investors became increasingly anxious about the º£½ÇÊÓƵ’s economic future.
The yield on the 30-year gilt, which reflects the price of government borrowing, reached 5.28 per cent on Tuesday following a gilt auction conducted by the Debt Management Office (DMO), as reported by .
The DMO sold £2.25bn of long-term government debt at a yield of 5.2 per cent, making Rachel Reeves the first Chancellor since Gordon Brown to oversee a bond auction with an average yield of over five per cent.
The auction attracted the lowest level of demand since December 2023, indicating that investors are less willing to purchase longer-term º£½ÇÊÓƵ government debt.
Yields and prices move inversely. With demand for gilts lower, prices fall which pushes up the yield.
The sell-off in º£½ÇÊÓƵ government debt is not unique among global peers. Government borrowing costs have increased around the world in recent months, reflecting fears about elevated debt levels and the potential inflationary impact of Donald Trump’s trade policies.
However, the sell-off in the º£½ÇÊÓƵ has been accentuated by concerns about the scale of government debt issuance and the domestic economic outlook. The Chancellor plans to borrow £297bn through financial markets this fiscal year, the second highest level on record
Markets also anticipate fewer interest rate cuts in 2025 due to fears about the potential persistence of inflation. This has put further upward pressure on gilt yields.
According to analysts, rising gilt yields may erode the Chancellor's financial flexibility when the Office for Budget Responsibility (OBR) releases its updated economic predictions in March.
Reeves had allocated only £9.9 billion to satisfy her main fiscal requirement that daily spending be covered by tax revenues.
Andrew Goodwin, the chief º£½ÇÊÓƵ economist at Oxford Economics, projected that increased gilt yields have already eaten into £6 billion of this leeway. "The wiggle room was already very small and it makes it even smaller," he said.
