The UK’s cost of borrowing has reached its highest level since 2002, with the interest rate on 30-year government bonds rising to 5.05 percent. This increase comes as the price of UK government bonds has fallen, reflecting expectations of sustained high global interest rates. These government bonds, also known as gilts, are purchased by financial institutions in the UK and internationally. Investors receive regular interest payments, or yields, in exchange for lending money to the government over the bond’s duration, which can range from one month to 30 years.
The current yield on UK government bonds surpasses the levels seen in the aftermath of former Prime Minister Liz Truss’s mini-budget, which triggered a financial market meltdown. At that time, the interest rate on 30-year bonds rose to as high as 4.8 percent, still lower than the current 5.05 percent. This rise in borrowing costs poses a challenge for the Treasury, as Chancellor Jeremy Hunt prepares to deliver the Autumn Statement on November 22. While it is uncertain whether tax increases will be included in the budget, Hunt has previously stated that tax cuts are “virtually impossible.”
Furthermore, the markets have also witnessed an increase in the yield on shorter-dated UK government bond prices. The interest rates on five-year gilts stand at 4.67 percent and at 4.6 percent on ten-year gilts. As a result, the government will have to pay a higher cost to borrow money, potentially impacting decisions related to public spending in areas such as healthcare and education. These sectors have experienced ongoing discussions with the government, leading to strikes by teachers and doctors throughout the year.
Amidst these financial challenges, the Conservative Party faces pressure to fulfill its promises of halving inflation, controlling interest rates, and engaging in negotiations with the public sector regarding spending. This critical period coincides with the government refining its policies ahead of the upcoming general election, which must take place no later than January 2025.
In addition, the UK’s national debt has reached a level higher than the past two years. Office of National Statistics figures show that government debt exceeded £2.5 trillion by the end of the first quarter of this year, compared to over £2.2 trillion at the same time two years ago. The pensions industry, funded by gilts, presents another challenge to government debt. Pension funds and insurers hold approximately a quarter of outstanding gilts. As yields on government bonds rise, asset managers become more positive about gilts. However, concerns arise that pension funds may withdraw from gilts just as the Bank of England reduces its own holdings and debt issuance remains high, thereby increasing pressure on British borrowing costs. In September, the Bank of England announced plans to sell £100 billion in bonds over the next 12 months, up from £80 billion the previous year.