The yield on the UK government’s 30-year gilt rose above six per cent for the first time since 1998 on Thursday, with gilt yields top six per cent at 6.04 per cent in early trading, sharpening the pressure on Chancellor John Healey ahead of a Budget now less than four weeks away. The move came during a broad global bond sell-off in which UK bonds were among the worst performers, with yields rising higher than those in the US, Japan and Germany.
Long-term gilt yields determine the size of government borrowing costs, and the crossing of the six per cent threshold matters directly to the public finances. The Office for Budget Responsibility said in the spring that debt interest payments would total £134.7 billion. The rise in yields since March will likely mean the OBR raises those forecasts again when it next publishes its numbers.
Gilt yields top six per cent and the cost to the Treasury
Economists have said that a one percentage point rise in rates adds roughly £15 billion to the debt interest bill by 2031. Analysis by RSM and several other City firms has suggested the rise in rates could cut about £9 billion from the headroom figure, which stood at £23.6 billion in March. Long-term gilt yields were around five per cent in January, the point at which the OBR last took a snapshot of market movements.
The OBR’s October 2024 economic and fiscal outlook set out the trajectory in detail. In nominal terms, debt interest spending falls to £104.9 billion this year before rising year-on-year to £122.2 billion in 2029-30. Taken together, that forecast has been revised up relative to March by an average of £12.6 billion a year, a revision the OBR attributes in part to the movement in market rates over the period.
The Office for National Statistics has added a further dimension to the picture. Interest payable on central government debt reached £9.1 billion in October 2024, an increase of £0.5 billion compared with October 2023 and the highest October figure since monthly records began in January 1997. The ONS figure underlines how the cumulative effect of elevated rates is already feeding through to actual monthly spending, not merely to forecast projections.
Meanwhile, the Autumn Budget 2024 published on GOV.UK shows that the OBR’s October 2024 forecast for the central government net cash requirement stands at £165.1 billion for 2024-25, representing an upward revision of £22.3 billion since the Spring Budget forecast on 6 March 2024. That revision in the borrowing requirement sits alongside the yield move as a further constraint on the Chancellor’s room for manoeuvre.
Spending pressures compound the gilt market strain
Beyond the cost of additional debt interest, Healey is also facing demands to fund extra defence spending and provide immediate support to families on the cost of living. The combination of a tighter fiscal position and rising borrowing costs leaves limited space for new commitments.
Elsewhere in the Labour government, Andy Burnham signalled this week that ministers intended to broaden the size of the state and take ‘greater public control’. In interviews on Wednesday, he admitted there was a ‘shortfall’ in plans to fund a free-at-the-point-of-use care service across England, adding to the impression of a government facing competing demands with narrowing resources.
Analysts at Pantheon Macroeconomics said traders remained confused about Burnham and Healey’s stance on borrowing, putting the UK in a less favourable position than other major economies. ‘The uncomfortable truth for the Prime Minister and his Chancellor is that the wide spread of gilt yields over peers is fair given the UK’s dire fiscal position and the inflationary pressures stemming from high energy prices,’ the consultancy said in a note.
Equities also came under pressure. The FTSE 100 dropped by nearly two per cent, and oil prices climbed above $100 per barrel amid concerns that negotiations between the US, Iran and other parties across the Middle East have stalled. The breadth of the market move suggests the gilt sell-off is not purely a UK story, even if the scale of the rise here exceeded that seen elsewhere. The OBR’s next set of forecasts, due alongside the Budget, will show whether the Chancellor retains any headroom at all under his fiscal rules once the revised debt interest numbers are factored in.
