Long-term borrowing costs in UK reach 28-year high amid rising inflation

Britain’s long-term borrowing costs have surged to their highest level since 1998, driven by escalating inflation worries and political uncertainty ahead of this week’s local elections.

On Tuesday afternoon, the yield on 30-year UK government bonds, known as gilts, hit a 28-year peak, climbing 0.14 percentage points to 5.798%.

This increase in yield signifies a drop in bond prices, as the two move inversely. Consequently, the government faces higher expenses when seeking to borrow from financial markets.

The yield on 10-year gilts also rose, lifting by 0.15 percentage points to 5.122%, though this remains below recent highs reported last month.

In contrast, US 10-year treasury notes were flat on Tuesday, despite a steady increase over recent weeks.

Gilt yields have grown amid growing predictions that the conflict in Iran will drive higher inflation due to spiking energy costs, which is then likely to cause the Bank of England to increase interest rates.

City traders currently expect the central bank to vote for at least two interest rate hikes in the coming months, despite the Bank maintaining the current rate of 3.75% last week.

The rise in gilt yields means the Government will face higher debt interest costs, providing more strain on the Chancellor’s spending powers.

It comes amid a backdrop of significant pressure on Prime Minister Sir Keir Starmer in the run-up to the UK local elections.

The pound was broadly flat at 1.353 versus the dollar on Tuesday.