Long-term borrowing costs in the UK surged to their highest level since 1998 on Tuesday, as a global bond rout extended into a second day amid rising oil prices and mounting inflation concerns.
The yield on 30-year UK gilts jumped 10 basis points to 5.89%, while the 10-year gilt yield rose to 5.25%, the highest since the 2008 financial crisis. The moves followed sharp increases in benchmark yields in Japan and the U.S. on Monday, where the 10-year Treasury yield hit 4.78%, the highest since early 2025. Germany’s 10-year yield, the eurozone benchmark, also climbed to a 15-year high of 3.34%.
The sell-off was driven in part by a surge in oil prices, with Brent crude rising over 2% to $92.42 a barrel and U.S. West Texas Intermediate climbing nearly 2% to $87.35. The gains came as geopolitical tensions in the Middle East tightened global energy supplies, with the near-total closure of the Strait of Hormuz further constraining oil and gas shipments.
The rise in yields reflects growing investor unease over inflation risks and elevated government borrowing. In the UK, the Office for Budget Responsibility’s headroom against its fiscal rule is estimated to have fallen to £13.8 billion from £26 billion in the spring forecast, largely due to higher debt servicing costs. The OBR had previously assumed gilt yields would average 5.1% this year, but current levels remain well above that projection.
Economists warn that sustained higher yields could weigh on public finances, with the UK spending an estimated 3.7% of national income on debt interest this year. The combination of rising borrowing costs and persistent inflation has raised questions about the credibility of fiscal and monetary policy in major economies.
The eurozone’s annual inflation rate accelerated to 3.3% in August, the highest since mid-2023, driven by a 14.3% surge in energy prices. The European Central Bank is widely expected to raise interest rates again at its September 10 meeting to address inflation that remains well above its 2% target. Core inflation, excluding volatile energy and food prices, eased slightly to 2.4% in August.
Analysts cite a mix of factors behind the bond market sell-off, including elevated government deficits, increased private-sector borrowing—particularly in AI-related infrastructure—and concerns over the long-term impact of economic populism on financial stability. The surge in yields across major markets underscores a broader reassessment of risk premia as investors demand higher compensation for holding long-dated debt amid persistent inflation pressures.
