Long-term borrowing costs leap to 28-year high ahead of UK budget

UK government long-term borrowing costs have been sent soaring to their highest levels for 28 years, adding more pressure on Prime Minister Andy Burnham's team ahead of next month's budget.

It came amid a widespread global bond sell-off as concerns over ratcheting oil prices and wider uncertainty over inflation grew.

The yield on 30-year UK government bonds – also known as gilts – jumped by 10 basis points to 5.89% on Tuesday morning, hitting the highest level since March 1998.

The yield on the benchmark 10-year gilt also swung notably higher, rising to as much as 5.223% – the highest rate since June 2008, at the height of the financial crisis.

Higher rates on the bonds will therefore mean that it costs Burnham and Chancellor John Healey more in order to borrow money.

Gilt yields move counter to the value of the bonds, meaning their prices fall when yields rise.

Japan's 10-year bond yield also swung to its highest since 1996 on Tuesday after rising above 3%.

The global uptick in yields is partly linked to signs of escalation in the Middle East, alongside concerns that inflation could accelerate in the coming months and lead central banks to lift their interest rates.

Oliver Faizallah, head of fixed income research at Raymond James, said: "While elevated bond yields are warranted given the inflationary and fiscal risks that are very clear and present, I also believe that the recent sell-off is fully pricing in these risks.

"As it stands, bond yields are priced for higher and prolonged second round inflation, consequent central bank hikes, and further government spending driven by an increase in bond sales.

"With the bad news in the price, there is a limitation to how much further bond yields can keep climbing."

By Henry Saker-Clark, Press Association Deputy Business Editor

Press Association: Finance

source: PA

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