Long-term borrowing costs in the UK have reached their highest levels since 1998

The UK’s long-term borrowing costs have reached their highest levels since 1998, as bond sales threaten to wipe out Chancellor Rachel Reeves’ “headroom” under her recently revised budget rules.

The yield on 30-year gilts hit 5.25 per cent on Tuesday, surpassing the previous peak in October 2023 and the bleak conditions came amid a market meltdown from Liz Truss’ botched “mini” Budget last year.

The new situation came after the Treasury paid off its 30-year borrowing costs this century, having sold £2.25bn of new debt at a yield of 5.20 per cent.

Recent increases in interest rates, if held, could wipe out the extra borrowing allowed by the chancellor’s budget rules, economists warned on Tuesday. The moves come along with weakening growth prospects which could further worsen the outlook as ministers await a new set of budgets in March.

The UK market’s woes come amid a global sell-off in government bonds in recent months, fueled in part by fears that US President Donald Trump’s tax plans will they go cheap.

Gilt investors have been very worried that the combination of anemic growth and persistent price pressures will push the UK into recession, where the Bank of England is prohibited from cutting rates to support the economy.

“You probably have a buyer’s strike going on right now,” said Craig Inches, head of rates and cash at Royal London Asset Management. He said a combination of high long-term gilt sales and “mixed” UK economic data was keeping investors out of long-term debt.

The UK economy contracted for the second straight month in October and failed to grow in the third quarter. Business confidence has been boosted following Reeves’ decision to impose a £25bn increase in employer national insurance funding in the Budget which, along with a planned increase in the national living wage, will raise labor costs.

At the same time, the latest data shows signs of continued inflation. Consumer price inflation rose in November to 2.6 percent from 2.3 percent in the previous month, prompting investors to restore hopes of a rate cut in 2025.

The move to gilt will be a big worry for the Treasury, as Reeves only divested himself of £9.9bn of mortgages against his key financial policy when he made plans to borrow money. Budget for October.

The Treasury expects new official estimates from the Office for Budget Responsibility in March, which will include a new estimate of the extent of the government’s deficit against its fiscal policy.

Ruth Gregory, an economist at Capital Economics, said the latest output and rate expectations, if held, would leave the Chancellor with just £1.1bn of headroom against key legislation the chancellor’s budget, which requires him to pay for current spending – excluding investment – with tax receipts.

It is ahead of any changes in the OBR’s forecasted economic outlook, which will also affect the financial outlook.

A final headroom forecast will not be determined until closer to the release of the next OBR forecast. The financier must produce two estimates each fiscal year, and must provide an update by March 26 on whether Reeves is on track to meet his lending standards.

But a forecast that shows the Treasury is breaching its financial rules could create a major headache immediately after the chancellor’s first Budget.

The situation is particularly difficult given the councilor’s decision to hold only one major financial event a year, meaning he intends to wait until this autumn before making the next tax and borrowing decisions. This means that any pre-specified breach of fiscal rules may need to be remedied by tougher spending measures.

“If the OBR judges in March that the main financial law has been broken, to maintain financial confidence, the chancellor may need to take some action,” said Gregory.

“So there is a risk that in order to achieve fiscal policy, it will be necessary to raise additional taxes or restrict spending. Either way, there appears to be a risk that fiscal policy will harder than others.”

A spokesman for the Treasury said it would not predict the OBR’s forecast but until the budget rules were “non-negotiable”, he added: “The Chancellor has made it clear he will not repeat the likes of the Budget of October and is now focused on reducing public consumption spending and growing the economy.”