UK 30-year bonds hit highest yield since 1998 on inflation

Britain’s government paid the highest interest rate on 30-year debt in almost three decades on Tuesday, a warning sign that rising global borrowing costs are squeezing public finances even in advanced economies with well-established debt markets.

The UK Treasury sold £4.25 billion, roughly $5.75 billion, of 30-year bonds through a syndicated sale, with the notes priced to yield 5.8168%. That was the highest yield at any UK gilt auction or syndication since the Debt Management Office was established in 1998 to run the country’s borrowing program. The previous record — 5.79% — was set at a DMO auction in May of that same year.

Despite the record cost, demand at the sale was heavy. Investors placed roughly £87.2 billion in orders for the bonds, with the DMO reporting that 71% of demand came from British domestic investors. The transaction was led by Bank of America, Goldman Sachs, J.P. Morgan, Santander and UBS.

The backdrop for the sale was a global bond selloff driven by fresh inflation concerns after the resumption of the Middle East conflict pushed oil prices higher. Brent crude was trading around $97 a barrel on Tuesday, with the Strait of Hormuz still largely closed to tanker traffic and Ukrainian strikes hitting Russian refineries. Britain now carries the second-highest government borrowing costs among larger advanced economies, trailing only Australia.

At the Commons Treasury Committee, Bank of England Governor Andrew Bailey told lawmakers that risks to inflation were tilted to the upside and that oil could rise further. Bailey said typical UK mortgage rates were already about three-quarters of a percentage point higher than at the point the Middle East conflict broke out, an effect he said had substituted, in part, for further Bank action on interest rates. The Bank’s monetary policy committee meets next week to set rates.

The yield spike also intensifies the fiscal challenge facing Chancellor of the Exchequer John Healey ahead of his October 28 budget. Healey’s predecessor, Rachel Reeves, had planned around £24 billion of leeway to hit medium-term goals for a balanced current budget by 2029/30, but those forecasts were finalized before the U.S. and Israel-Iran conflict resumed. Higher borrowing costs are now expected to wipe out at least half of that headroom when the Office for Budget Responsibility publishes its updated forecast before the budget. The OBR had previously projected debt-interest costs would reach £109 billion this year, equal to 8.4% of public spending.

For U.S. bond markets, the UK sale is a signal that inflation-driven pressure on long-dated government debt is widespread. British and American long yields tend to move together with global risk sentiment, meaning that pressure on London’s borrowing costs typically feeds through, at least in part, to U.S. Treasury yields — and, by extension, to U.S. mortgage rates and other consumer borrowing costs.

Filed under: Aiken SC Business News