UK long-term borrowing costs hit highest level since 1998 ahead of October budget

Long-term government borrowing costs have risen to a 28-year high, putting more pressure on Prime Minister Andy Burnham ahead of his first budget next month.

The yield on a 30-year bond (a loan to the British government) rose to 5.89%, the highest since 1998.

The effective cost of borrowing for governments around the world has continued to rise this morning with new multi-decade highs in market interest rates.

The moves reflect concerns about inflation stemming from the ongoing war with Iran, competition from major technology companies for long-term loans and concerns about state debt levels.

All of those factors will make the budget process more complicated for Burnham, who will face MPs on Tuesday for the first time as prime minister, and her chancellor John Healey.

Higher borrowing costs will reduce the room for maneuver the government has under its self-imposed fiscal rules, limiting the amount Healey can spend on consumer-friendly measures to ease the cost of living.

Downing Street said fiscal discipline is the “bedrock” of Britain’s economic stability and national security.

But a spokesman for the prime minister declined to comment directly on rising borrowing costs.

“The chancellor and prime minister agree that the government will stick to the fiscal rules with a buffer against uncertainty and we are cutting the deficit faster than any other G7 economy to the lowest level in six years,” the spokesperson said.

The yield on the benchmark 10-year bond rose to its highest rate since June 2008, at the height of the global financial crisis.

Bond yields move against the value of bonds, meaning their prices fall when yields rise.

Borrowing costs in the United States, Japan and Europe have reached similar levels in recent days.

Global markets reacted in particular to suggestions in the United States that its central bank could raise rates. The UK market was closed yesterday for the bank holiday. Japan also faces pressure to raise rates.

The Chancellor is in the United States attending a meeting of finance ministers and central bankers from around the world. He told the G20 that the UK had had the fastest growth of the G7 in 2026 so far, that productivity was improving and that the UK was cutting its debt at the fastest pace of major economies.

JP Morgan’s chief market strategist for Europe, Karen Ward, said governments around the world want to increase spending and are turning to borrowing to finance it.

And he told the BBC’s World at One that they increasingly have to compete with major technology companies raising money to invest in the AI ​​revolution, driving up the amount of interest charged.

“Markets are having a lot more choice about who they lend to and at what interest rates,” he added.

Burnham has implemented a series of interventions to support consumers and businesses since entering Downing Street, and is expected to prioritize other measures to ease the cost of living in the Budget on 28 October.

Ward urged Burnham and Healey to set out how they will fund any new spending on defense and the cost of living, and how money will be returned to those who lend money to the government.

Kathleen Brooks, head of research at investment firm XTB, told the BBC news channel: “Of course, this is red lights flashing.”

“We are used to pockets of volatility; it has been a volatile few months,” he says.

But record levels of public debt and record tax revenue mean “these are not comfortable times for the new government and the new chancellor,” he says.

Every time bond yields rise, the UK has to pay more in interest on the debt, he says.