UK gilt yields hit 18‑year high, adding £6bn to debt cost

UK gilt yields surged on Tuesday, with the 10‑year benchmark reaching about 5.2%, the highest level in 18 years. The jump, driven by a global bond sell‑off, lifted the cost of new government debt and pushed the overall borrowing rate up by as much as 15 basis points.

The rise matters because higher interest payments erode the Treasury’s fiscal headroom. The Office for Budget Responsibility (OBR) now projects that the government could face an extra £6bn in debt‑service costs by 2030, tightening the space for public spending under existing fiscal rules.

According to John Healey, the Treasury’s chief financial adviser, the extra burden could cut the fiscal cushion from roughly £22.7bn to around £16.7bn. The OBR’s latest forecasts now show total debt‑interest payments reaching £137bn by 2030.

Kathleen Brooks, research director at XTB, linked the yield spike to soaring oil prices after renewed hostilities in the Middle East. She noted that Brent crude touched $91 a barrel following fresh missile exchanges between the US and Iran over the weekend.

“We are now just two months away from the US mid‑term elections, and President Trump shows no sign of scaling back the war in Iran to win votes, even though the conflict is not popular at home,” she said.

Economist Simon French of Panmure Liberum warned that the surge in 20‑year gilt yields could shave up to £6bn off the Treasury’s headroom, a hit that will reverberate through public‑sector budgeting.

Policy response and the Bank’s balance sheet

The Bank of England may temper its quantitative tightening programme to ease pressure on gilt yields. Oxford Economics adviser Michael Saunders suggested reducing the annual bond‑sale target from £70bn to £50bn, arguing that a slower pace would limit upward pressure on rates.

While the Bank maintains that its sales have had a modest impact on market pricing, politicians across the aisle, including Louise Haigh and Richard Tice of Reform UK, have criticised the sell‑off for costing taxpayers billions.

Wider economic fallout

Higher borrowing costs are expected to bite into the housing market. Capital Economics warned that commercial property values could be compressed, while RSM UK economist Thomas Pugh said a fall in mortgage approvals in July may signal a tougher second half for residential sales.

Analysts remain divided on whether the Monetary Policy Committee will raise rates later this year, with many waiting to see how the geopolitical tension in the Middle East evolves.

In the short term, the surge in gilt yields adds pressure on both public finances and private borrowers, setting the stage for a cautious outlook across the UK economy.