30-year government bond yields 5.82%! UK borrowing costs surge to their highest level since 1998, significantly increasing fiscal budget pressure.

The UK's long-term borrowing costs have risen to their highest level in nearly 30 years, and the global bond sell-off is putting direct pressure on UK public finances.

On Tuesday, the UK Debt Management Agency (DMO) completed a £4 billion issuance of 30-year government bonds with a yield of 5.82%, marking the highest issuance rate since the DMO's establishment in 1998. This figure not only signifies that long-term borrowing costs in the UK have reached a 30-year high, but also places greater constraints on the upcoming fiscal budget.

Fund manager Gordon Shannon said the recent rise in UK government bond yields is directly linked to global market trends, but "the sharp jump in domestic borrowing costs will undoubtedly reduce the government's policy space in next month's budget."

Meanwhile, the yield on 10-year UK government bonds has risen to 5.2%, the highest among the G7 countries. In a speech on Monday, UK Chancellor of the Exchequer John Healey acknowledged that the UK's annual debt interest payments have reached £110 billion, exceeding all major areas of government spending except healthcare, and pledged to "honestly address" the need to control spending in the budget.

The issuance was well-received by the market, and the high returns attracted investors.

Despite the volatile market environment, the bond issuance was met with enthusiastic investor demand. Early information sent to investors indicated that total orders for the syndicated bond issuance exceeded £85 billion, representing a subscription multiple far exceeding the issuance amount.

Stephen Jones, chief investment officer at Aegon Asset Management, said: "It's painful for some, but an opportunity for others. Investors believe that the current yields offered by UK government bonds are attractive enough to justify increasing their holdings."

DMO CEO Jessica Pulay also stated that the successful completion of the transaction in a volatile market environment "further demonstrates the continued strength and depth of the UK government bond market, as well as the strong support from market participants for the financing plan."

The DMO plans to issue a total of £250 billion in government bonds this year to support government spending plans.

The global bond sell-off fueled the fire.

The surge in UK borrowing costs is not an isolated incident, but rather a microcosm of the ongoing pressure on global bond markets.

The core driver of this round of global bond sell-off is the sharp rise in energy prices following the outbreak of the Iran war —Brent crude oil prices have once again approached $100 per barrel, significantly cooling market expectations for interest rate cuts by major central banks and posing a continued impact on global economic growth and inflation prospects.

Long-term interest rates in other major European economies also hit new highs on Tuesday: the yield on French 30-year bonds rose to 5.02%, the highest since September 2008; the yield on German 30-year bonds rose to 3.86%, the highest since 2011.

In the UK, market pricing indicates that traders expect the Bank of England (BoE) to raise interest rates by at least 25 basis points this year. This rate hike is not expected to materialize at this month's meeting, but investors generally anticipate that the BoE will slow the pace of its government bond sales (quantitative tightening), as this operation has already put additional upward pressure on long-term government bond yields.

Debt interest pressures force fiscal consolidation

High borrowing costs are pushing British public finances into an even more dire situation. The UK's annual debt interest payments of £110 billion have become the "second largest department" in the government budget—a figure Chancellor John Healey used in a speech on Monday to illustrate this point, noting that if debt interest were considered a government department, its size would be second only to the Department of Health, exceeding the combined size of the Department of Defence, the Home Office, and the Department of Justice.

Since the COVID-19 pandemic, UK long-term yields have experienced a sustained upward trend, further accelerated by the energy price shocks triggered by the Iran war and market concerns about a global debt glut. The pricing of the 30-year government bond at 5.82% officially "locks in" this 30-year high above the coupon cost of newly issued bonds, implying a heavier fiscal burden for decades to come.

Against this backdrop, the upcoming fiscal budget is expected to face more limited policy maneuvering, and the government will face a greater dilemma in choosing between spending expansion and fiscal consolidation.

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