Medium-term borrowing costs for the UK government reached their highest levels in nearly two decades on Thursday as investors continued to divest from global bonds amid concerns over rising inflation. The yield on 10-year UK government bonds climbed by 0.06 percentage points to 5.515% by midday in London, marking the highest rate since July 2007, a period when the global financial crisis began to unfold.

Longer-dated government securities—20- and 30-year gilts—also saw significant increases in yields, hitting levels not seen since 1998. Yields rise when bond prices fall, reflecting investor uncertainty and increased risk perceptions. The surge in borrowing costs comes amid a broader selloff in government debt across major economies, driven in part by soaring oil prices and continued geopolitical tensions related to the unresolved conflict in the Middle East.

The rising costs are expected to place additional pressure on Chancellor John Healey ahead of his first scheduled budget on October 28. Economists suggest that the weaker growth outlook combined with higher borrowing expenses may have already eroded close to half of the £24 billion fiscal buffer established under Healey’s predecessor, Rachel Reeves, during the spring statement in March. The Chancellor is widely anticipated to increase taxes partly to rebuild this cushion and to finance policy measures such as the six-month VAT relief on electricity bills and targeted energy support for low-income households.

However, some economists caution against aggressive fiscal tightening. Andrew Wishart of Berenberg Bank noted that raising taxes to maintain the Treasury’s fiscal headroom at the March forecast level could unnecessarily harm economic incentives. He further argued that gilt yields may decline over the next year as the Bank of England is expected to slow the pace of interest rate hikes from the four currently priced in by investors.

The Bank of England is broadly expected to raise rates again at its November meeting to combat persistent inflationary pressures, following similar moves recently undertaken by the European Central Bank, the Federal Reserve, and the Bank of Japan.

The global bond market selloff extends beyond the United Kingdom. France has experienced pronounced impact amid political difficulties passing its budget, but heightened yields have been a widespread phenomenon. Kristalina Georgieva, managing director of the International Monetary Fund, urged governments to implement tighter fiscal policies in response to rising borrowing costs, emphasizing the need for prompt action ahead of the IMF’s annual meeting in Bangkok.

Elevated bond yields raise borrowing costs not only for governments but also for households and businesses, with knock-on effects on mortgages and corporate financing. In the United States, Treasury Secretary Scott Bessent’s efforts to curb long-term yields through increased government bond buybacks have so far been ineffective. The yield on the targeted 30-year Treasury bonds has climbed from approximately 5.235% at the time of the buyback announcement in August to over 5.7% currently.