Britain set to pay highest borrowing costs since 1998 in major bond sale

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The bond sale could raise up to £5billion as Chancellor John Healey faces growing pressure ahead of the Budget

Britain is on course to pay its highest borrowing costs in more than 28 years as a punishing sell-off in global bond markets sends gilt yields surging.

The yield on 30-year UK government bonds stood at 5.83 per cent on Tuesday, a level not seen since May 1998.

The Government is preparing to borrow billions of pounds from investors today, with a major sale of long-term debt expected to come at a record cost.

The Treasury is selling more of a government bond that matures in January 2056. The deal will add to £5.9billion of debt first issued in May 2025, when investors were offered a yield of 5.405 per cent, itself a record for a syndicated gilt sale.

Megum Muhic, a strategist at RBC Capital Markets, said the latest sale could raise as much as £5billion.

If borrowing costs remain at current levels, it would be the most expensive syndicated debt sale since the Debt Management Office was established in 1998.

Government bond markets around the world have come under pressure amid fears that higher energy prices could drive another rise in inflation.

Investors are also concerned about growing government deficits, while a surge in corporate borrowing from companies involved in the artificial intelligence boom has added more debt to the market.

UK government bonds, known as gilts, have been particularly badly affected, with British yields rising faster than those of any other G7 country in recent weeks.

Uncertainty surrounding the Government's upcoming Budget has added further pressure to gilt prices.

Britain is not alone in facing higher borrowing costs as the United States sold 30-year bonds last month at the highest interest rate since 2001. Germany also recently paid its highest borrowing costs since 2011 in a syndicated bond sale.

Last week, the UK also sold £900million of 25-year inflation-linked gilts at a record yield of 2.496 per cent.

The rise in borrowing costs is putting further pressure on Chancellor John Healey ahead of his Budget on October 28.

Bloomberg Economics estimates that the Government's financial headroom under its own fiscal rules has fallen by half from the £23.6billion buffer it had in the spring, leaving it with roughly half that amount available.

Mr Healey has promised to use the Budget to ease financial pressures facing households and businesses, while also signalling that the Government will need to control its own spending.

In his first major speech as Chancellor on Monday, he promised to be "honest" about the need to rein in public spending.

He said: "Fiscal discipline underwrites every promise this government makes."

He has not, however, ruled out raising taxes to close what economists have warned could be a gap of up to £19billion.

The Resolution Foundation has cautioned that unfunded spending pledges and the fallout from the Iran war have significantly eroded the Government's room for manoeuvre.

Britain's public sector net debt has climbed from around 85 per cent of gross domestic product in the 2019-20 financial year to just over 94 per cent at the end of July, according to the Office for National Statistics. That represents the heaviest debt burden since the 1960s.

The cost of servicing that debt reached £7.7billion in July alone. Across the 2025-26 financial year, eight pence of every pound spent by the Government has gone on debt interest, House of Commons Library figures show.

Higher inflation is also pushing up the annual debt interest bill, which now exceeds £100billion.

Prime Minister Andy Burnham said last September that Britain should not be "in hock to the bond markets."

Since entering Downing Street in July, however, Mr Burnham has committed to upholding the fiscal rules while seeking "flexibility."