Britain has locked in its highest borrowing cost on a Government bond sale since comparable records began in 1998, adding fresh pressure to Chancellor John Healey ahead of his first Budget.
The UK Debt Management Office sold £4.25 billion of 30-year Government debt on Tuesday through a syndicated reopening of the 5⅜% Treasury Gilt 2056.
The bonds were sold at a yield of 5.8168% — the highest yield recorded at any gilt auction or syndication since the Debt Management Office was established in 1998.
The sale comes amid a sharp rise in long-term borrowing costs in Britain and other major economies, driven by renewed inflation concerns and uncertainty in global bond markets.
Strong demand despite record borrowing cost
Despite the historically high yield, demand for the debt was extremely strong.
Reuters reported that investors placed orders worth around £87.2 billion for the £4.25 billion of gilts on offer.
That means the sale should not be interpreted as investors refusing to lend to the Government. Instead, the key issue for the Treasury is the increasingly high interest rate Britain must offer to attract long-term borrowing.
Reuters reported that around 71% of the bonds were allocated to domestic investors.
Pressure builds ahead of Healey's Budget
The record yield comes as Chancellor John Healey prepares to deliver his first Budget on 28 October.
Higher gilt yields can increase the cost of financing Government debt and reduce the Chancellor's room for manoeuvre against his fiscal rules.
The Office for Budget Responsibility is currently forecasting debt-interest spending of around £109 billion this year, according to Reuters.
That leaves the Government particularly exposed to changes in interest rates, inflation and the cost of servicing the national debt.
Long-term gilt issuance scaled back
Long-dated Government debt once accounted for a much larger proportion of British borrowing.
However, the Debt Management Office has reduced its reliance on long conventional gilts as borrowing costs have risen and demand from traditional buyers such as pension funds has changed.
Reuters reported that long-dated conventional gilts are now expected to make up less than 10% of the £246 billion of gilt issuance planned for the current financial year.
Global pressures hitting bond markets
Britain is not alone in facing higher long-term borrowing costs, with bond yields rising across a number of advanced economies.
But the level of UK yields remains politically sensitive because higher financing costs feed directly into the public finances and can restrict the amount available for tax cuts or additional spending.
The latest sale therefore provides a stark illustration of the environment facing Healey as he prepares his first major fiscal statement.