UK pays 5.04% to borrow for five years, highest since 2008
Britain sold £4.5bn of five-year government bonds at a yield of 5.04 per cent on Tuesday, the highest annual payment on such debt since the 2008 financial crisis, the Debt Management Office said. The auction, which matures in 2032, drew bids 3.5 times the amount on offer as investors bought gilts carrying the highest yields in the G7.
The timing lands the result on the eve of John Healey's first Budget as Chancellor. The UK now spends more than £115bn a year servicing its debt, more than the education budget for England and roughly double the defence budget. Healey has said he will keep his predecessor Rachel Reeves's fiscal rules and her promise not to raise any of the three largest taxes, and must match day-to-day spending with tax receipts by the end of the parliament in 2029.
Yields across developed markets have climbed since the Iran war began, on concern about its inflationary impact and persistently large deficits. The 10-year US Treasury yield has risen by more than a full percentage point since the conflict started and France's 10-year OAT yield by 1.73 percentage points. Even so, UK yields remain the highest of any developed economy, despite a deficit reduction plan recently praised by the International Monetary Fund.
Investors attribute that premium to Britain's exposure to inflationary shocks and years of political uncertainty. "Higher bond yields help attract the foreign capital the UK needs, but they also raise the government's interest bill, eroding fiscal headroom and leaving even less space for spending or tax relief," said Kevin Thozet, portfolio adviser at Carmignac. "The more expensive it becomes to fund the external deficit, the more difficult it becomes to run an expansionary fiscal policy."
Andrew Wishart, senior UK economist at Berenberg, said the Chancellor should hold to strict fiscal consolidation, which "sets it apart from other major economies". "Deviating from the plan would cause investors to demand a larger term premium for holding gilts," he said.
