UK borrowing costs have surged to levels not seen since the late 1990s, triggering renewed fears of a “doom loop” in Government finances and fresh pressure on mortgage holders.
On Wednesday, the yield on 30-year gilts rose to 5.746%, its highest point since 1998, up from 5.698% at the close of trading on Tuesday. The 10-year gilt yield also remained around 4.8%, close to its highest levels in 2025. Because bond prices fall when yields go up, the climb reflects a sharp sell-off in UK debt. Rising gilt yields ripple beyond Government borrowing costs, as they directly influence long-term interest rates, including those tied to fixed-rate mortgages.
Mortgage experts warn this could translate into higher borrowing expenses for households already under strain.
Matthew Ryan, head of market strategy at financial services firm Ebury, said that markets are increasingly sensitive to the Government’s fiscal outlook. He said: “Bond vigilantes appear particularly critical of what may be perceived as fiscal mismanagement from the Government, with the massive shortfall between spending and income almost certain to force further tax hikes in the autumn.
“The problem facing the UK is that the further bonds continue to climb, the larger the Government’s costs are to finance the public debt, and the greater the tax hikes will need to be in order to plug the gap, risking a deadly ‘doom loop’ that could completely derail Britain’s economy.”
Analysts caution that while part of the move is linked to a global bond sell-off — with US, European, and Japanese Government debt also under pressure — domestic political factors are adding to volatility.
Prime Minister Keir Starmer reshuffled his Cabinet on Monday, shifting Chancellor Rachel Reeves’s deputy, Darren Jones, into a new role. Downing Street has insisted Ms Reeves retains full authority, despite speculation over her standing with markets.
Yet others argue the situation is more complex than a simple buyers’ strike. David Roberts, who leads fixed income at Nedgroup Investments, pointed out that the UK’s most recent £14billion gilt sale attracted record investor demand of £150billion.
Similar records were set in the US yesterday, with $46billion of corporate issuance, and in Europe, where sovereign and corporate supply passed €40billion.
Mr Roberts said: “Now, you can interpret this in two ways. Firstly, there’s a surge in supply, which can pressure prices. Secondly, and more importantly, there’s extraordinary demand – investors are actively seeking yield in a high-rate environment.
“Gilt prices fell a little again today. Bash the UK as much as you like, the fall was largely in reaction to yet more upbeat economic numbers. This time in the shape of revised PMI figures, showing the UK growing at a healthy rate”
“What you definitely can’t say is that there’s a buyers’ strike. The numbers speak for themselves.”
The market remains sensitive to supply, demand, and economic data, so volatility is expected to continue, according to Kathleen Brooks, research director at XTB.
She said the “focus is likely to remain on the Budget for some time” as bond markets look for reassurances on how Ms Reeves will plug a black hole in the nation’s public finances – estimated by some to be as much as £51billion.
She said: “UK bond yields have been on an upward trajectory for most of this year and have risen significantly since Labour took office. The bond market will need some hefty persuading that Labour will rein in public sector spending and bring the UK’s finances under control.
“This is why we expect to see bouts of UK bond market volatility in the coming months.”
What does rising gilt yields mean for mortgages and pensions?
Gilt yields are the interest rates paid on British Government bonds (also known as gilts). A Government Bond is a type of debt-based investment used to finance public spending, and yields fluctuate based on supply, demand, and expectations for interest rates and inflation.
When gilt prices fall, yields rise, reflecting higher borrowing costs for the Government.
Rising gilt yields have wider implications across the economy. They influence mortgage rates, especially fixed-rate deals, because lenders use swap rates – which closely track gilts – to set pricing. Higher yields usually mean lenders pass on increased borrowing costs to borrowers, making mortgages more expensive.
Pensions can also be affected. Rising yields increase annuity rates, meaning retirees looking to lock in guaranteed incomes may benefit from better deals.
Defined benefit pension schemes, which promise a set income in retirement, also calculate their liabilities using gilt yields. When yields rise, the present value of future pension payments falls, potentially reducing funding gaps for schemes.
However, rising yields can reduce the value of existing bond holdings in the short term for defined contribution (DC) pensions. George Sweeney, investing and pensions expert at personal finance site Finder, said: “This means people close to retirement, or those who are already retired, are likely to feel the worst effects.”
However, for people who are a long way off from retirement, Mr Sweeney said lower bond prices and higher yields can be “beneficial”. He said it “could be something of an investment opportunity”.
He explained: “It means new pension contributions and reinvestments into gilts and bonds have a lower entry price, and will potentially earn a greater level of income going forward.”
He added: “The gilt and bond markets are delicately balanced, and the see-sawing of yields and prices has the potential to significantly destabilise a pension portfolio. The actual impact – and whether it’s a curse or an opportunity – will depend on how heavily invested someone’s pension is in bonds, and at what stage of the retirement savings cycle they’re currently at.”
