Britain’s long-term borrowing costs climbed to their highest level since the late 1990s on Tuesday, while the pound suffered its steepest fall in more than a year, reflecting growing concern over the country’s fiscal outlook.
Thirty-year government bond yields — a key measure of the cost of borrowing — rose to 5.697%, a level last seen in May 1998. At the same time, sterling dropped more than 1.5% against the dollar and lost ground against the euro, making it the weakest performer among major currencies on the day.
The moves underline investor doubts about the Labour government’s ability to keep spending in check while grappling with sluggish growth and the highest inflation rate among G7 nations.
Investor Unease Over Fiscal Path
The sell-off in gilts followed a broader downturn across global bond markets, where rising debt levels are weighing heavily on prices. But sterling’s sharp decline was seen as a uniquely British problem.
“Over the summer, there’s been a bit of a risk premium built into the rates market,” said Nick Kennedy, an FX strategist at Lloyds. “Investors are now demanding more of a risk premium for sterling as well.”
The sense of unease has been fuelled by expectations that the government will have to rely on heavier borrowing in the months ahead, just as the Bank of England is keeping interest rates high to curb inflation.
Starmer’s Economic Team Under Spotlight
The pressure intensified a day after Prime Minister Keir Starmer reshuffled his senior advisers. Darren Jones, previously deputy to finance minister Rachel Reeves, was moved into a new role at Downing Street to help coordinate policy, while former Bank of England deputy governor Minouche Shafik was appointed chief economic adviser.
The changes were intended to strengthen Labour’s economic credibility ahead of a difficult budget expected later this year. But they also sparked headlines suggesting Reeves’s influence had been diluted — an impression that unsettled some investors.
Budget Speculation and Market Fears
With the budget not expected until November, speculation is mounting over potential tax rises and spending cuts. Santander now expects the Bank of England to hold interest rates at 4% until at least the end of 2026, abandoning its earlier forecast for cuts next year.
Neil Mehta, a fund manager at BlueBay Asset Management, warned that repeated jumps in gilt yields are leaving the government with fewer options. “With each rise in yields, we are getting closer to the point where the government’s room for manoeuvre runs out,” he said, adding that deeper problems in housing, energy and the labour market will take years to resolve.
A Wider Global Trend
Britain is not the only country facing fiscal strain. French bond yields hit a 16-year high this week amid political uncertainty, while Japan has seen heavy selling in its debt market as concerns mount over its rising obligations.
“You see long-end yields rising everywhere, but the UK does tend to perform the worst,” said Kennedy.
Even so, demand for British debt remains robust. The government sold a record £14 billion of new 10-year bonds on Tuesday, attracting more than £140 billion in orders — a reminder that, despite doubts, investors are still willing to back the UK.
