UK issues £4.5bn in gilts at highest yield since 2008 as Budget looms

High borrowing costs squeeze fiscal headroom for Chancellor John Healey

By LineZotpaper AI staff

Published27 October 2026

Read Time2 min

Illustration: UK issues £4.5bn in gilts at highest yield since 2008 as Budget looms

The UK Debt Management Office has issued nearly £4.5 billion in five-year gilts at a yield of 5.04 per cent, the highest annual payment since the global financial crisis, on the eve of Chancellor John Healey's first Budget. The sale underscores the constrained fiscal headroom facing the government, which now spends over £115 billion a year servicing its debts.

The Debt Management Office (DMO) has issued £4.5 billion of bonds maturing in 2032 at a yield of 5.04 per cent, the highest rate since 2008. The auction was 3.5 times oversubscribed as investors sought the highest yields available among G7 economies.

Government bond yields have climbed sharply since the onset of the Iran war, driven by escalating concerns over the conflict's inflationary impact and persistently large deficits across developed economies. The yield on the 10-year US Treasury has climbed by more than a percentage point since the war began.

Kevin Thozet, portfolio adviser at Carmignac, said that while higher bond yields help attract foreign capital, they also raise the government's interest bill. "Higher bond yields help attract the foreign capital the UK needs, but they also raise the government's interest bill, eroding fiscal headroom and leaving even less space for spending or tax relief," he said.

The UK now spends more than £115 billion a year servicing its debts, exceeding the budget for education in England and roughly double the defence budget. Healey has committed to predecessor Rachel Reeves' fiscal rules and a pre-election pledge not to raise the three largest taxes, requiring a tight balance between spending and tax receipts by the end of the parliament in 2029.

Andrew Wishart, senior UK economist at Berenberg, urged the Chancellor to stick with the existing fiscal consolidation plan, arguing it "sets it apart from other major economies." He warned that deviating from the plan would cause investors to demand a larger term premium for holding gilts.

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Analysis

Why This Matters

High borrowing costs reduce Chancellor Healey's opportunity for spending or tax relief in his first Budget.
UK debt servicing costs now exceed the education budget and are roughly double defence spending.
UK gilt yields are the highest among G7 economies, reflecting sustained investor demand for a risk premium.

Background

The UK government's cost of borrowing has risen sharply since the outbreak of the Iran war, compounding the fiscal pressures created by large deficits and high inflation globally. Healey is delivering his first Budget on Wednesday, constrained by the strict fiscal rules and tax commitments he inherited from Rachel Reeves.

Key Perspectives

Kevin Thozet, portfolio adviser at Carmignac: Higher yields attract capital but raise the interest bill, eroding headroom for spending or tax relief and making expansionary fiscal policy harder. Andrew Wishart, senior UK economist at Berenberg: The Chancellor should stick to strict fiscal consolidation to maintain investor confidence and avoid higher premiums on future gilt sales.

What to Watch

Chancellor Healey's Budget on Wednesday and how he addresses the constrained fiscal headroom.
Whether the yield on UK gilts continues to rise relative to other developed economies.
The broader inflationary and fiscal impact of the Iran war on global bond markets.

Sources

Government issues debt at highest interest rate since financial crisis on eve of Budget · City AM

Checked

12 claims in this story checked against 1 source: 10 supported.

Show each claim

SupportedThe UK issued £4.5bn in gilts at the highest yield since 2008 as the Budget approached.City AM: “The Debt Management Office has been forced to sell nearly £5bn of five-year gilts at their highest interest rate since 2008, underscoring the fiscal challenge facing John Healey on the eve of his maiden Budget.”
SupportedHigh borrowing costs are squeezing the government's fiscal headroom.City AM: “they also raise the government’s interest bill, eroding fiscal headroom and leaving even less space for spending or tax relief”
Partly supportedThe DMO issued nearly £4.5bn in five-year gilts.City AM: “The body responsible for selling the UK’s debt said it had issued £4.5bn of bonds maturing in 2032 at a yield of 5.04 per cent on Tuesday.”
SupportedThe gilts maturing in 2032 yielded 5.04 per cent, the highest rate since 2008.City AM: “it had issued £4.5bn of bonds maturing in 2032 at a yield of 5.04 per cent on Tuesday. The figure is the highest annual payment since the global financial crisis”
SupportedThe 5.04 per cent figure was the highest annual payment since the global financial crisis.City AM: “The figure is the highest annual payment since the global financial crisis sent stock markets plunging and interest rates to historic lows.”
SupportedThe auction was 3.5 times oversubscribed as investors sought the highest yields available among G7 economies.City AM: “The auction was 3.5 times oversubscribed, the Debt Management Office ( DMO ) said, as investors looked to hoover up UK government bonds at a time where they are attracting the highest yields of any G7 economy.”
Partly supportedGovernment bond yields rose sharply after the Iran war began, driven by inflation concerns and persistent deficits across developed economies.City AM: “Government bond yields have climbed sharply since the onset of the Iran war amid escalating concerns over the conflict’s inflationary impact and developed economies running persistently large deficits.”
SupportedThe 10-year US Treasury yield rose by more than a percentage point since the war began.City AM: “The yield on the 10-year Treasury – the world’s most widely traded bond – has climbed by more than a full percentage point since the war began”
SupportedKevin Thozet said: “Higher bond yields help attract the foreign capital the UK needs, but they also raise the government's interest bill, eroding fiscal headroom and leaving even less space for spending or tax relief,”City AM: ““Higher bond yields help attract the foreign capital the UK needs, but they also raise the government’s interest bill, eroding fiscal headroom and leaving even less space for spending or tax relief,” said Kevin Thozet, portfolio adviser at Carmignac.”
SupportedThe UK spends more than £115bn a year servicing its debts, more than England's education budget and roughly double the country's defence budget.City AM: “The UK now spends more than £115bn a year servicing its debts, which is more than its education budget for England and roughly double the country’s defence budget.”
SupportedHealey has committed to Reeves' fiscal rules and her pre-election promise not to raise the three largest taxes.City AM: “Healey has committed to his predecessor Rachel Reeves’ self-imposed fiscal rules as well as her pre-election promise not to raise any of the three largest taxes.”
SupportedWishart urged the Chancellor to stick with the fiscal consolidation plan, saying it “sets it apart from other major economies,” and warned that leaving it would lead investors to demand a larger term premium for gilts.City AM: “Andrew Wishart, senior UK economist at Berenberg, said the Chancellor should stick to its strict fiscal consolidation, which “sets it apart from other major economies.” “Deviating from the plan would cause investors to demand a larger term premium for holding gilts,” he added.”