The average yield on UK government bonds, known as gilts, sold to investors so far this year is 3.8 per cent, according to analysis of figures from the Debt Management Office, the body that sells the government's debt. That is close to levels last seen in 1998, when the average yield on newly issued debt topped 4 per cent.
Yields have stayed near that three-decade high for two years. The causes include stubborn inflation, investor worries about high public borrowing across rich economies, and hundreds of billions of pounds of gilt sales by the Bank of England as it unwinds bond holdings from quantitative easing.
The higher cost of paying investors who buy that debt has added pressure on public finances. The Office for Budget Responsibility predicts debt interest spending will top £100 billion a year, equal to the combined defence and Home Office budgets, until at least the 2030s.
Public borrowing has already overshot official forecasts this financial year, and economists have warned the pair that the headroom against the government's main fiscal rule, which requires day-to-day spending to be funded by tax revenues, may have more than halved from £23.7 billion. That is because of rising gilt yields and higher energy prices after the outbreak of war in the Middle East six months ago.
That likely erosion has stoked speculation about tax rises or spending cuts at the budget on 28 October. Burnham said last week he would not be "unrealistic" about the "challenging" state of the public finances, and refused to rule out tax increases.
Britain has had persistently high inflation since Russia's invasion of Ukraine in 2022, which forced the Bank of England to raise interest rates to a peak of 5.25 per cent. Bank Rate has since fallen to 3.75 per cent.
Markets started the year expecting several rate cuts in 2026. That changed in February, when the US and Israel launched strikes against Iran. The conflict has left the Strait of Hormuz effectively closed for more than six months, sending oil and gas prices spiralling and keeping central banks cautious. Investors now think one or two rate rises could come before the end of the year.
James Smith, developed markets economist at ING, said: "This year it's been all about oil. For all the talk about Burnham and what he means for the bond market, government borrowing costs have been driven almost singularly by energy prices and their perceived impact on the Bank of England."
Tomasz Wieladek, chief European macro strategist at T Rowe Price, said: "The UK's fiscal fundamentals aren't bad relative to other countries. But the big difference is poor inflation performance. That is the true reason why gilt yields are higher than in other countries, as investors now require inflation compensation."
Longer-dated debt has taken the brunt of investor nerves about rich governments' appetite to rein in borrowing, with 30-year bond yields touching multi-decade highs in August. Britain, however, remains on track to cut its deficit at the fastest pace in the G7 in coming years under plans set out by Healey's predecessor, Rachel Reeves, and some analysts expect gilt yields to fall back before the budget.
The Treasury said: "The OBR will publish its updated forecast alongside the budget in October and we will not comment on rumour, speculation or proposals about its contents ahead of then."
