(Sept 29): The UK government is set to pay the highest yield since 1999 at an upcoming auction of 10-year debt, as investors demand additional premiums to compensate for persistent inflation and the prospect of spending increases in next month’s budget. 

Britain’s Debt Management Office is scheduled to sell up to £4.25 billion (US$5.6 billion or RM22.95 billion) of 4.875% coupon bonds maturing in July 2036 on Tuesday. A sale of the same security last month notched an average yield of 5.16%, already the highest in nearly two decades. Since then, 10-year yields have climbed further, hitting a 19-year peak of 5.38% on Monday. Yields stood at 5.41% on Tuesday. 

The surge in gilt yields is part of the global increase in borrowing costs, as elevated energy prices fan fears that inflation will remain higher for longer, forcing central banks to tighten policy further. In addition, there are concerns over the huge scale of public borrowing and the resulting increase in the debt-servicing burden.

“Borrowing figures remain incredibly challenged, while events in the Middle East show no sign of calming and thus energy costs will remain raised,” said Richard Carter, head of fixed interest research at Quilter Cheviot Ltd. “That desire for fiscal discipline could be left wanting unless growth prospects suddenly change.”

In the UK, traders expect the Bank of England to raise interest rates in November, pricing as many as five rate hikes by end-2027.

Meanwhile, the Oct 28 budget will be a high-stakes moment for Chancellor of the Exchequer, John Healey, who has sought to reassure investors that Prime Minister Andy Burnham’s government will keep tight control of the purse strings. On Monday, he went to lengths to pledge fiscal restraint in his debut budget.

Still, higher yields are enticing some investors to buy. Last month’s 10-year auction was oversubscribed more than 3.6 times, the strongest demand since April 2020. Gilts may also get support from the BOE’s decision to pause its quantitative tightening programme and no longer sell long-dated debt into the market. 

Bidding for the bond auction closes at 10am in London, with the results announced a few minutes later.  

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