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Britain Is Paying 6% to Borrow for 30 Years, the Most Since 1998. Why the October 28 Budget Matters to Bond Investors Everywhere

What happened

A gilt is a bond issued by the UK government. The 30-year gilt yield is the interest rate Britain pays to borrow money for three decades.

On October 1, that rate crossed 6% for the first time since 1998. It climbed to about 6.04% on October 7 during a global bond sell-off. No other Group of Seven country has paid that much on long-term debt since the euro crisis of 2012.

Why yields are so high

Four forces are pushing at once:

1. Oil above $100. Energy prices keep UK inflation sticky, and bond buyers want extra interest to make up for it.
2. The Bank of England. Markets expect tighter policy, not cuts.
3. Supply. The government is selling a lot of bonds. A September sale of 30-year gilts went at about 5.82%. Higher supply means buyers can demand more.
4. Politics. Prime Minister Andy Burnham and Chancellor John Healey have been in office only a little over three months. Investors don't yet know how they will tax and spend.

None of this is unique to Britain. The US 10-year yield touched 5.35% last week, and France's debt problems pushed the euro to a 17-month low. The UK is just the most extreme case in the G7.

Why October 28 is the big date

Healey delivers his first Budget on Wednesday, October 28. The Office for Budget Responsibility, the UK's official fiscal watchdog, publishes its forecasts that same day.

Higher yields make his job harder. Every extra point of interest raises what the government pays on new debt. By one estimate, that has shrunk his room to meet his own borrowing rules to about £13 billion.

What bond markets want to hear:

• A credible plan to meet the fiscal rules. Healey has said he will stick to them.
• No surprise borrowing. Bank of America expects the Budget to add about £15 billion a year to borrowing in the near term.
• Where the money comes from. Income tax, employee National Insurance and VAT rates have reportedly been ruled out, so tax rises would have to come from elsewhere.

Britain has seen how badly this can go. In September 2022, a "mini-budget" with unfunded tax cuts sent gilt yields soaring and forced the Bank of England to step in. Markets will judge this Budget against that memory.

Why it matters outside the UK

Bond markets are connected. When gilt yields jump, US Treasury and Canadian bond yields often follow. That lowers the price of bond funds you may own.

Long bonds swing the most. A 30-year bond loses far more value than a 2-year bond when rates rise. If your "safe" bond fund holds mostly long-dated bonds, it isn't as safe as it looks. Our plain-English guide to bonds explains why.

Mortgages can follow. Fixed mortgage rates in Canada track government bond yields, which move with global markets.

What you can do

• Check your bond fund's duration. It's on the fund's fact sheet. A duration of 15 means roughly a 15% price drop if rates rise one point.
• Shorter is calmer. Short-term bonds, T-bills and GICs barely move when long-term yields jump.
• Don't sell in a panic. Higher yields also mean higher income from here on.

What to watch next

• October 28: the UK Budget and OBR forecasts. The same day the Fed and the Bank of Canada announce rate decisions.
• Gilt auctions in the run-up to the Budget.
• Oil. A drop below $100 would ease pressure everywhere.

Frequently asked questions