Government borrowing costs hit 28-year high

The cost of long-term borrowing for the UK government has risen to its highest level for 28 years, amid the war with Iran and growing political uncertainty.

The yield on 30-year government bonds, known as gilts, rose to around 5.86 per cent in the week of 5 May, the highest level since 1998.

What are gilts?

Gilts are bonds issued by the government to borrow money. The yield is the return that investors demand for lending to the government. When yields rise, it costs the government more to borrow, leaving less money for public services or tax cuts.

Gilt yields also influence the interest rates charged on mortgages and loans across the economy.

Why yields have risen

Investors are worried about several things at once. The war with Iran has pushed up energy prices and inflation, which erodes the value of bonds. Markets now expect the Bank of England to keep interest rates higher for longer.

The war has affected the UK more than any other country in the G7 group of leading economies, because of its reliance on imported energy.

There are also concerns about the government's borrowing plans, and about political uncertainty ahead of this week's local elections. The Prime Minister, Keir Starmer, is facing threats to his leadership, and some investors fear a change of leader could bring higher borrowing.

Memories of 2022

The rise in yields has revived memories of the market turmoil that followed the mini-budget in September 2022, when gilt yields soared and the Bank of England had to intervene to protect pension funds.

This time, the rise has been more gradual, and economists say there is no sign of a crisis. But the higher cost of borrowing will make it harder for the Chancellor, Rachel Reeves, to meet her rules on the public finances.

The cost of debt

The UK government already spends more than £100 billion a year on interest on its debt, more than it spends on many public services. Higher yields will add to that bill over time, as old debt is replaced with new borrowing at higher rates.

What it means for households

For households, higher gilt yields mean mortgage rates are likely to stay high. Savers, however, may benefit from better rates on savings accounts and annuities.

What next

Much will depend on the course of the war, the Bank of England's next decisions and the political fallout from the local elections.