Britain's government paid the highest yield on 10-year debt since 1999 at a bond auction on Tuesday, as months of turmoil in the gilt market pushed up borrowing costs. The result adds pressure on government finances just as mortgage approvals and house-price growth already show signs of slowing.
Auction demands 5.383% yield
The UK's Debt Management Office sold £4.25 billion of a new gilt maturing in 2036 on Tuesday morning, with bond investors demanding an average yield of 5.383% to buy the debt. That is the highest yield on 10-year UK debt since September 1999, according to Reuters.
Demand for the debt still ran high: the auction received bids for more than three times the amount of debt on offer, showing investors remain willing to buy UK debt, but only at a higher price.
Months of bond market turmoil
The result follows months of turmoil in government bond markets, driven by inflation fears, which has pushed up the yield on debt traded between bond investors. Higher inflation expectations have therefore raised the cost the government must pay to borrow, since rising yields push up the cost of servicing the national debt.
Earlier this month, the government was forced to pay the highest interest rate for a 30-year bond since 1998. These borrowing costs carry implications for the government's spending plans.
Mortgage market already feeling the strain
The rise in borrowing costs is already showing up in housing data. Mortgage approvals fell from 56,000 in July to 54,900 in August, the lowest since December 2023, according to Paul Dales, chief UK economist at Capital Economics. Dales said the fall shows that the sharp rise in mortgage rates is restraining activity, even though the Bank of England has not yet raised its own interest rate.
Dales added that the trend is consistent with house price inflation slowing from 1.7% in August to around 0% in six months' time.
Source: Business | The Guardian
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