Britain’s borrowing costs surged close to their highest level in more than a quarter of a century on Monday, piling more pressure on Rachel Reeves.
The yield on 30-year UK bonds – known as gilts – rose by as much as four basis points to 5.19pc on Monday, close to its highest point since 1998.
It comes as the Government prepares to sell £6.5bn worth of long-term gilts on Tuesday and Wednesday. The Chancellor announced near-record spending plans in her October Budget, which are being partially funded by increased borrowing.
The jump in market prices means Ms Reeves is expected to be the first chancellor since Gordon Brown to oversee a gilt auction with yields over 5pc.
Yields – the return the Government promises to pay buyers of its debt – have been pushed higher by a flood of sovereign bonds hitting markets, as well as doubts over Britain’s potential for economic growth.
Mohit Kumar, an economist at Jefferies, said: “There is a growing fear that UK growth and fiscal projections may be a bit too optimistic.”
The Office for Budget Responsibility (OBR) forecast in October that the economy would grow by 1.1pc in 2024, 2pc in 2025 and 1.8pc in 2026.
However, the economy is on the brink of recession after no growth in the third quarter of the year and a contraction of GDP in October, the first month of the fourth quarter.
A slew of recent private sector surveys have also pointed to a rapid slowdown in business activity and hiring in the wake of the Budget.
Weaker-than-expected growth would increase pressure on the Government’s finances by leading to lower-than-expected tax receipts. This would force Ms Reeves to either borrow more, cut spending or raise taxes.
Concern about “higher gilt issuance” was fuelling the rise in yields, Mr Kumar said.
Rising gilt yields pile further pressure on the Chancellor by requiring more money to be set aside for debt interest payments. Oxford Economics has estimated that Ms Reeves’s headroom to meet her Budget plans would shrink to just £3.5bn if gilt yields remained at their current levels.
Sanjay Raja, senior economist at Deutsche Bank, warned that the Chancellor would “likely be in breach of her own revised fiscal rules” if the OBR were to update its growth forecasts today.
He said: “Spending pressures are likely to only pick up as economic growth fails to match the fiscal watchdog’s more optimistic projections.”
Mr Kumar said worries about the impact of a Donald Trump presidency on inflation had also triggered a sell-off in longer-dated bonds. Bond sell-offs cause yields to rise.
He said investors were selling bonds over “concerns that Trump policies could lead to higher fiscal deficit and higher inflation”.
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On Monday, the yield on 30-year US Treasuries rose to 4.85pc – the highest level since November 2023. The US is preparing to issue $119bn (£94.9bn) of government debt this week.
Both US and UK bond yields eased during afternoon trading on Monday, amid hopes that Mr Trump’s inflation-stoking tariff plans will not be as severe as expected.
Mr Trump’s aides are preparing proposals to apply tariffs only on sectors seen as critical to national or economic security, according to the Washington Post, rather than blanket import taxes.
The president-elect denied the report, which he said “incorrectly states that my tariff policy will be pared back. That is wrong”.
The report boosted the pound despite the denial. Sterling surged at its fastest pace against the dollar since November, rising by as much as 1.1pc to $1.255.
Lee Hardman, of Japanese bank MUFG, said: “I think the market’s just going to continue to digest these moves and wait for further insights about whether this is going to be the direction the Trump administration is going to go down.”