The yield on thirty-year gilts touched 6.05 per cent this week, its highest level since 1998, while the ten-year yield, the benchmark for much of Britain's new borrowing, climbed to 5.527 per cent, a peak not seen since July 2007. Twenty-year yields reached 6.00 per cent.
The sell-off is global, with American Treasuries under similar pressure, but gilts have been among the weakest markets as investors fret about inflation, heavy government issuance and the credibility of the Chancellor's plans. It has been driven by a sharp rise in oil prices after attacks on shipping in the Gulf, compounded by fears that a hurricane will disrupt American production. Brent crude jumped five per cent on Thursday alone to 105 dollars a barrel, its highest since late September.
Into this febrile atmosphere stepped Andrew Bailey. In a speech on Thursday, less than three weeks before John Healey's first Budget on 28 October, the Governor invoked the aftermath of Liz Truss's 2022 mini-budget as "an illustration of what can happen in these much-changed conditions", and warned that spending plans must "be directed towards stability and be seen by markets as credible".
The Bond Rout at a Glance
- Thirty-year gilt yields hit 6.05 per cent, the highest since 1998; twenty-year yields reached 6.00 per cent.
- Ten-year yields climbed to 5.527 per cent, the highest since July 2007.
- Brent crude jumped five per cent on Thursday to 105 dollars a barrel after attacks on Gulf shipping.
- Higher yields have wiped out roughly half of the Chancellor's 23.6 billion pound headroom; analysts put the remainder at about 11 billion pounds.
- Markets price roughly an 80 per cent chance of a Bank Rate rise to 4 per cent on 5 November.
- The next landmarks are inflation figures on 21 October, the Budget on 28 October and the MPC on 5 November.
The headroom is evaporating
The arithmetic confronting Mr Healey is stark. When he named the Budget date in the summer, the Office for Budget Responsibility's headroom against his fiscal rules stood at 23.6 billion pounds. Analysts at EY now estimate that higher yields and a weaker economy have cut that cushion to around 11 billion pounds, and warn that an escalation of the Middle East conflict could erase it entirely, in a scenario where inflation reaches six per cent and the economy tips into recession.
The Bank of England held Bank Rate at 3.75 per cent in September on a six to three vote, with three policymakers already pressing for a rise, and simultaneously slowed its quantitative tightening programme by halting sales of long-dated gilts. That bought the market a day or two of calm before the global rout overwhelmed it. The Governor has since cautioned that the longer energy volatility persists, the more likely further rate rises become.
What to watch next
Three dates now dominate the City calendar. Inflation figures on 21 October will show how far the energy shock is feeding into prices, with CPI at 3.1 per cent and rising. The Budget on 28 October must convince investors that the Government's sums add up; a credible statement could trigger a relief rally, while any hint of looser fiscal rules risks pushing yields higher still. The Monetary Policy Committee then meets on 5 November, with markets pricing roughly an 80 per cent chance that Bank Rate rises to 4 per cent.
For households, the consequences are already visible. Lenders have begun repricing fixed-rate mortgages in response to the rise in yields, and the FTSE 100 has wobbled as the sell-off deepened. The Chancellor's room for manoeuvre, like the Governor's patience, is narrowing by the week.