Global bond sell-off piles new pressure on UK borrowing costs before budget

By the Editorial Team · Friday, September 25, 2026

UK government bond yields surged to near two-decade highs ahead of Chancellor John Healey’s budget, raising borrowing costs and reducing the fiscal headroom established under the previous administration. This increase complicates the government’s ability to meet fiscal targets without significant tax hikes or spending cuts, while ongoing inflationary pressures and rising energy prices risk prompting further monetary tightening by the Bank of England.

Government bond markets experienced a sharp sell-off this week, applying renewed upward pressure on borrowing costs in the United Kingdom ahead of Chancellor John Healey’s upcoming budget. By mid-morning Thursday, yields on 10-year UK government bonds, known as gilts, reached 5.38%, approaching the highest level recorded in nearly two decades, set just last week.

The rising yields, which reflect higher interest rates, increase the immediate cost of government borrowing and have significant implications for fiscal planning. They directly influence the forecasts of the Office for Budget Responsibility (OBR) regarding whether the government is on track to meet Labour’s established fiscal rules. Analysts have noted that recent increases in bond yields appear to have eroded more than half of the £24 billion fiscal headroom built up under former Chancellor Rachel Reeves during the spring statement in March.

Healey, who succeeded Reeves, has pledged to maintain compliance with these fiscal targets while retaining a buffer to manage economic uncertainties. However, this buffer is widely expected to be considerably less than the prior £24 billion. Restoring that level would likely require substantial tax increases or spending reductions. Treasury officials have indicated that the forthcoming budget will be “focused,” postponing major spending decisions to a comprehensive review planned for next year.

The global sell-off in government bonds extends beyond the UK, with investors divesting holdings amid concerns over rising inflation and interest rates. These pressures have intensified as the ongoing conflict in the Middle East contributes to elevated oil prices, a key input driving inflation. Clare Lombardelli, the Bank of England’s chief economist, addressed the issue during an economic conference in Warsaw on Thursday, warning that prolonged high energy prices increase the risk of sustained inflationary pressures. She noted that if energy costs remain elevated without clear signs of falling inflation or weakening economic activity, the Bank of England may need to tighten monetary policy further.

Such rate increases would raise mortgage costs for homeowners, heightening financial strain amid efforts by some regional governments, including Andy Burnham’s administration, to provide consumers with relief against the rising cost of living. The Bank of England also anticipates a significant 24% hike in the quarterly energy price cap for household utility bills in January if oil prices persist at current levels.

Despite recent rate stability, following a hold at 3.75% announced last week by the Bank’s Monetary Policy Committee, officials have emphasized the uncertain outlook. Both Lombardelli and Governor Andrew Bailey have highlighted that while immediate inflationary effects from higher oil prices have been limited compared to expectations, prolonged elevated prices risk entrenching inflation through wage demands and price-setting behavior.

The bond sell-off has also hit US markets, with yields on 30-year Treasury bonds climbing to 5.444%, their highest since 2004. Investors express concerns about rising inflation and the potential for unchecked US government spending, alongside factors such as increased bond issuance from artificial intelligence firms, which may be affecting demand for Treasury securities.

This article was reported by synthesizing coverage from multiple independent news outlets to present a balanced, unbiased account. Read about our editorial standards. Spotted an error? Let us know.