The increase in gilt yields puts Rachel Reeves under more strain

Precarious levels of government borrowing costs are being reached by rising gilt yields

Rachel Reeves, Labour's beleaguered chancellor of the exchequer, is facing yet another challenge as gilt yields are rising once more.

The cost of government borrowing increased this morning, September 3, when yields on 10-year UK government gilts climbed above 4 percent. Since 1997, the yield on 30-year gilts has increased to more than 5 per cent.

"The issue facing the UK is that the more bonds rise, the more expensive it is for the government to finance the public debt," stated Matthew Ryan, Ebury's head of market strategy.

In the Autumn Budget, Reeves might have to raise taxes in order to close the gap. Ryan claims that this could "completely derail Britain's economy" by creating "a deadly doom loop" of rising taxes, slowing growth, and growing government deficits.

Ryan continued, "We're not there yet, but everyone will be watching to see how chancellor Reeves and her team plan to move forward."

Given her self-imposed budgetary restrictions, the increase in borrowing costs could further enclose Reeves. The government appears to be in a situation where reducing spending will be very difficult, but increasing revenue runs the risk of harming economic growth or betraying Labour's election-related pledges.

Why are gilt yields increasing, and what are they?

Bonds, or debt, issued by the British government are known as gilts. Their income is stated as a percentage of the bond's purchase price, just like that of all bonds. This is known as the yield.

Since the income they pay is fixed in nominal terms, prices and yields move in opposite directions. Therefore, an increase in gilt yields indicates a decline in the value of UK government bonds. This raises the cost of borrowing for the government.

"The confidence of bond markets in the UK government is reflected in gilt yields," stated Emma Moriarty, portfolio manager at CG Asset Management. Even though Trump's tariff policy has contributed to the global economy's decline, "the reality is that the government came out of the last budget round with wafer thin fiscal headroom."

According to Ryan from Ebury, "Bond vigilantes seem to be especially critical of what may be perceived as fiscal mismanagement from the government." "More tax increases are almost a given in the fall due to the enormous gap between income and spending.

The rise in gilt yields is due to other factors. Senior portfolio manager Fred Repton of Neuberger's global fixed income team points out that, after the extended Labor Day weekend, US investors' summer vacation season ended on September 2.

Bond market participants may have been a little taken aback by the significant increase in new issuance, according to Repton. As a matter of fact, yesterday was the biggest issuance day in European history. Although prices have obviously been impacted by this supply spike, Repton advises that "one should not draw too many conclusions from one extremely active day for issuance."

The Autumn Budget is due when?

Reeves declared this morning that on November 26, the 2025 Autumn Budget will be unveiled.

In a video announcing the date, Reeves stated, "We must keep a tight grip on day-to-day spending through our non-negotiable fiscal rules in order to bring inflation and borrowing costs down."

The government's pledge to finance daily expenses solely from revenue and to borrow only for investments by 2029/30 is the main directive contained in these fiscal regulations.

This is made more difficult by rising gilt yields, which raise the costs of servicing the government's existing debt. Higher borrowing costs will raise the cost of servicing the government's implicit need to continue borrowing to fund ongoing expenditures until the end of the target period.

In the absence of a sudden spike in the UK GDP, Reeves will have to reduce spending or increase tax revenue in the Autumn Budget. Both strategies will be politically delicate.

"There is still no effective majority for cutting expenditure, despite the worsening fiscal situation," Moriarty said, referring to the very public U-turn on proposed cuts to welfare spending. However, Labour basically ruled out any changes to income tax, employees' national insurance, or VAT when it pledged during last year's election campaign not to increase taxes on "working people."

Raising taxes in a way that doesn't negatively impact working people has been the main focus of proposals to strengthen the fiscal position, according to Moriarty. Proposals like a wealth tax, for instance, are feared to discourage economic activity due to their unclear effect on revenue.

What impact do growing gilt yields have on your finances?

Both the UK government and the governments of the majority of developed countries are thought to be among the most trustworthy borrowers in the world. The Bank of England would probably step in to stop a default from ever happening, but this would have its own issues because it would raise inflation. The UK has never defaulted on its debt and is argued to never will.

Other bonds are typically priced in relation to gilts since gilt yields are regarded as the gold standard in the bond market.

For instance, gilt yields and mortgage rates are frequently related. The yields on 30-year gilts, which are the highest since the year 2000, are usually linked to long-duration mortgages.

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