Britain has paid the highest interest rate on five-year government debt for nearly two decades, with the UK selling £4.5 billion of five-year gilts at an average yield of 5.036 per cent. This marks the steepest cost of borrowing at this maturity since 2008, according to the latest gilt auction by the Debt Management Office, which regularly raises money for government spending by selling bonds to investors.
The surge reflects broader global pressure on borrowing costs since the start of the US-Iran war, as investors have pushed up yields around the world on expectations that energy price inflation will lead to higher interest rates. However, UK yields are particularly elevated compared to other major economies. The UK now has the highest government bond yields among the G7 group of wealthy nations, exceeding even France, according to market data. At a similar auction of ten-year gilts late last month, the UK paid an average yield of 5.38 per cent, the highest since 1999.
Chancellor John Healey faces a significant challenge as he finalises his Budget. Higher borrowing costs increase the expense of servicing Britain's record £3 trillion national debt pile, leaving less money available for areas such as defence and social care. Economists have warned that the Chancellor risks repeating the market turbulence that followed Liz Truss's mini-Budget in 2022 if investor confidence deteriorates further. The elevated yields reflect market concerns about Labour's tax and spending plans at a time when the tax burden is approaching a post-war high.
Professor Joe Nellis, head of economic research at accountancy firm MHA, said the Chancellor's 'central challenge' was to 'restore confidence in the state of the public sector finances'. He noted that borrowing costs have risen sharply in recent months while demands for additional public sector spending continue to grow, particularly in health, social care and defence, creating competing pressures with no easy solutions.
Aran Bajwa, a portfolio manager at Columbia Threadneedle Investments, urged Healey to make 'difficult choices' on welfare, work incentives, pensions, social care and the overall size of the state, rather than relying on spending cuts pushed further into the future. He said markets are 'increasingly sceptical' of plans that postpone difficult decisions, and that investors would reward governments that confront fiscal challenges directly through structural reform rather than narrowly targeted tax rises that add complexity to the tax system.
For UK savers, borrowers and businesses, higher government bond yields typically feed through to increased mortgage rates, business loan costs and savings account rates, amplifying financial pressures for households and firms already squeezed by elevated living costs.