The UK has locked in its highest UK gilt yield since 1998, selling £4.25 billion of January 2056 bonds at 5.82% in a sale that drew more than twenty times the amount offered in orders, as Chancellor John Healey faces mounting pressure to raise taxes at his first Budget. The transaction, reported by Bloomberg, marks the steepest yield on any new gilt since the Debt Management Office was established.
Record orders but a punishing price
Buyers submitted more than £85 billion in orders for the 30-year bond, according to TechTimes, a figure that underlines strong underlying appetite for UK debt even at its current price. Jessica Pulay, the DMO’s Chief Executive, said 71% of demand came from high-quality investors, a composition that will offer some reassurance to the Treasury despite the cost of the borrowing.
The DMO had marketed the bond at 0.75 basis points over the yield of the government’s 2055 gilt. The body operates independently of the Treasury, and its decision to proceed at this yield will add to the fiscal arithmetic Healey must navigate before the Budget. The government is already projected to spend more than £137 billion in debt interest payments in 2030.
Global bond markets have sold off sharply in recent weeks, with fears over persistent inflation (driven in part by the impact of the Iran war on oil prices) pushing borrowing costs higher across developed economies. The UK has been hit harder than most. According to Yahoo Finance, Britain now carries the second-highest government borrowing costs among larger advanced economies, behind only Australia. Yields on UK debt touched their highest level in decades last week.
UK gilt yield since 1998 tightens the Budget headroom
The timing is uncomfortable for Healey. Analysts have warned the Chancellor has little room for additional borrowing and may be forced to raise taxes in order to remain within the fiscal rules, which require day-to-day spending to match receipts by 2030.
Thomas Pugh, an economist at the accountancy RSM, said the headroom may have come down to as little as £11.5bn, mostly as a result of higher borrowing costs. That compares with the £23.6bn headroom the Office for Budget Responsibility said the Chancellor held against the fiscal rules at the Spring Statement in March. Ruth Gregory of Capital Economics suggested that traders would only ‘tolerate’ £15bn more in borrowing.
Healey acknowledged the problem directly. In a speech on Monday he admitted that borrowing costs were ‘too high’ and argued that growth was the ‘pathway out of indebtedness’. Addressing MPs on Tuesday, he said the previous Conservative government had ‘collapsed confidence in Britain’s fiscal strength.’
Higher long-term yields also reflect investor concern that Prime Minister Andy Burnham’s government is unlikely to restrain public spending, given competing demands for greater military funding and cost-of-living support through winter. Just after taking power, Burnham suggested there was ‘flexibility’ in the fiscal rules for more borrowing.
Reform pledge and the personal allowance row
The Chancellor also used his appearance before MPs to dismiss Reform UK’s proposal to raise the tax-free personal allowance to £15,000, calling it a promise the government ‘can’t keep’. He said such tax cuts would be left ‘under review.’
The combination of a UK gilt yield since 1998 at its highest, a compressed fiscal cushion, and an approaching Budget gives Healey limited space to manoeuvre. With the OBR’s headroom estimate having roughly halved since the spring, according to RSM’s Pugh, the first test for the Chancellor’s fiscal credibility is drawing close.
