UK 10-year bond yield reaches highest level in 19 years — The Guardian

In the United Kingdom, the yield on 10-year government bonds rose by 0.06 percentage points on October 8, to 5.515%. This is the highest level since July 2007. Investors continue to sell government bonds from various countries amid concerns about accelerating inflation.

Rising borrowing costs

Yields on 20- and 30-year British government bonds, known as gilts, also increased significantly and reached their highest levels since 1998. Bond yields rise when their market price falls.

As The Guardian reports, the latest sharp movements in the government bond market were driven by international factors. The bond sell-off intensified in the largest economies amid rising oil prices and the lack of a settlement of the conflict in the Middle East. Investors are also concerned about the prospect of higher inflation and uncontrolled growth in government spending.

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Pressure ahead of the budget

According to economists, rising borrowing costs and weaker economic growth prospects may have reduced by about half or more the £24 billion budget headroom for complying with fiscal rules. This headroom was created in March by Rachel Reeves, John Healey's predecessor as chancellor.

John Healey is due to present his first budget on October 28. He is expected to raise taxes to partly restore the budget headroom, as well as fund a six-month reduction in VAT on electricity and a limited energy support program for the poorest households.

Berenberg Bank economist Andrew Wishart warned that excessive tax increases aimed at fully restoring the headroom could harm economic incentives. He believes that British bond yields may fall over the next year if the Bank of England raises rates fewer than the four times investors currently expect.