UK Bond Yields Surge to 26-Year High Amid Fiscal Worries; Pound Drops Sharply

London, 3 September (Kiran News): UK financial markets came under renewed pressure on Tuesday as the yield on 30-year government bonds (gilts) jumped to 5.69%—the highest level since 1998—while the pound slumped as much as 1.3% against the US dollar. The FTSE 100 Index also retreated 0.5%, reflecting mounting investor unease over the country’s fiscal outlook.

The sell-off in long-dated gilts was triggered by a combination of global bond market weakness, concerns over structurally higher inflation, and waning demand from traditional buyers such as pension funds. The UK Debt Management Office has already reduced gilt issuance to a record low, but market watchers warn more cuts may be needed.

Rising borrowing costs now threaten to complicate the government’s plans, with Chancellor Rachel Reeves facing a projected £35 billion budget gap ahead of the autumn budget. Economists are increasingly predicting tax hikes may be unavoidable to meet the government’s fiscal rules.

Allianz CIO Ludovic Subran warned that “the return of the bond vigilantes” is putting renewed pressure on UK policymakers, while Credit Agricole’s Valentin Marinov noted the pound is once again acting as a “pressure valve” for investor concerns.

The moves have sparked comparisons to the 2022 market turmoil during former Prime Minister Liz Truss’s tenure, though the current sell-off has been more gradual. Still, analysts caution that further inaction could prompt steeper borrowing costs and force more drastic government measures, including spending cuts or tax increases.