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The UK’s long-term borrowing costs hit their highest level since 1998 on Tuesday as investor worries over the threat of stagflation mount.
The yield on the 30-year gilt touched 5.21 per cent, ahead of the result of an auction of £2.25bn worth of longer-dated bonds.
The increase pushed the yield past a previous peak touched in October 2023 and surpassed levels reached during the height of the market fallout from Liz Truss’s ill-fated “mini” Budget in 2022.
Investors’ concerns over the outlook for the UK come amid a global sell-off in government bonds in recent months, driven in part by fears that US president-elect Donald Trump’s tariff plans will be inflationary.
But gilt investors have been particularly worried that a mix of weak growth and persistent price pressures will push the UK into a period of stagflation, where the Bank of England is constrained from cutting rates to support the economy.
“You’ve probably got a bit of a buyer’s strike going on at the moment,” said Craig Inches, head of rates and cash at Royal London Asset Management. He said a combination of a high volume of long-dated gilt sales and “mixed” UK economic data was deterring investors from ultra long-term debt.
The gilt movements will be a concern in the Treasury, given chancellor Rachel Reeves left herself only a narrow margin of headroom against her revised fiscal rules when she set out borrowing plans in the October Budget.
The Treasury is expecting a fresh round of official forecasts from the Office for Budget Responsibility in March, which will include a new estimate of the amount of wiggle-room the government has against its self-imposed fiscal regime.
Andrew Goodwin of Oxford Economics said he estimated recent movements in yields and rate expectations had erased about two-thirds of the £9.9bn worth of headroom against the chancellor’s key budget rule, which requires her to cover current spending — excluding investment — with tax receipts.
The final headroom forecast will not be determined until closer to the OBR outlook is released.
“The chancellor took a bit of a gamble in the Budget in leaving so little headroom,” Goodwin said. “There are numerous ways this could go wrong, and gilt yields were one obvious one.”