UK 30-year borrowing costs top 6% as global bond sell-off pressures budget

UK government borrowing costs have climbed to levels not seen for a generation. The effective interest rate on 30-year government debt rose above 6 per cent, touching the highest since 1998. At one point it crossed 6 per cent twice in a day.

The move is part of a global bond sell-off. US 10-year Treasury yields hit their highest since 2002. Long-term borrowing costs in Japan, Germany and France are also near quarter-century highs. One economist described world bond markets as being on fire.

The immediate trigger is the war in Iran and the wider Gulf conflict. Oil prices have risen, reaching around $105 a barrel. That has pushed up inflation and led investors to expect interest rates to stay higher for longer. At the same time, governments have borrowed heavily for years. Investors are demanding a bigger return to lend them more. The result is pressure on finance ministries across the world.

For the UK, the fiscal cost is stark. Annual debt interest payments are already around £110bn to £120bn, according to one broadcast discussion, more than the defence or education budgets. If all government debt were priced at 6 per cent, the annual interest bill could reach £180bn, an extra £60bn. The average duration of UK debt is about 12 years, which leaves the public finances exposed when rates rise.

The budget due on 28 October is now dominated by these pressures. In March, the Chancellor had about £24bn of headroom against his borrowing rule. The Resolution Foundation calculates that the war may have cut that buffer to about £5bn. That makes tax rises or spending cuts more likely. The opposition has called for any tax rises to be ruled out. Financial markets want evidence of difficult, unpopular choices. A Labour minister said it would not speculate on the budget and stressed that fiscal discipline and fiscal rules matter.

Political pressure is also building on spending. Critics point to forecasts that PIP benefits could double by 2030, an increase of about £19bn. They also cite the decision to scrap the two-child benefit cap, which could mean some larger families receive £21,000 more, taking total benefits to around £29,000. Supporters of the government point to measures such as cuts to VAT on electricity bills, lower bus fares and business rates relief for hospitality. The defence budget is another squeeze: there are questions about whether the government will reach 3 per cent of GDP by 2030 or follow a longer path to 2035.

Households are feeling the same market shift. The average five-year fixed mortgage rate has reached 5.94 per cent. Moneyfacts figures suggest that is about £150 a month more than in February. A typical mortgage has seen monthly repayments rise by as much as £163 since the Gulf war began. About 2.3 million households are due to come off fixed-rate deals next year. Another 1.8 million are re-mortgaging this year. In the US, mortgage rates have reached 7.49 per cent, the highest in three years. High rates help savers but hurt younger borrowers and anyone refinancing.

Markets outside the UK are under strain too. France is facing investor concern about its debt and a lack of political appetite for cuts. EU officials are worried about a growing trade imbalance with China and have threatened tariffs if talks in Beijing fail. The US and China have extended a trade truce, but the global backdrop remains fragile. Some commentators warn that if yields keep rising and no credible plan emerges, a market panic could force emergency action on interest rates or even external intervention. Others say the comparison with Greece is overdone but agree the red lights are flashing.

The common thread is debt. Governments spent years borrowing cheaply. That era is closing. As bond yields rise, debt interest costs eat into budgets, borrowing costs for companies and households go up, and governments have less room to spend or cut taxes. For the UK, the next test is the budget, with the bond market watching.