UK Sells Inflation Linked Gilts at Highest Cost in Over Twenty Years

The United Kingdom has issued 20 year inflation linked gilts at the highest borrowing costs seen in more than two decades, as bond markets react to persistent concerns over inflation and government debt. The latest auction raised £800 million at a yield of 2.41 percent, marking the steepest price for these bonds since 2001.

Inflation linked gilts, widely referred to as linkers, are pegged to the retail price index and provide investors protection against rising prices by adjusting both the principal and coupon with inflation. Strong appetite was evident at this auction, as bids exceeded £3 billion, representing the highest bid ratio for these bonds since 1998, according to the Debt Management Office.

Rising long term interest rates have led governments to pay a premium when issuing debt. The ten year gilt auction conducted earlier this week also generated immense demand, with more than £140 billion in bids. Despite strong interest, these higher yields indicate the stressed environment in which the UK government is borrowing, a challenge mirrored across other developed economies.

Long term yields reached new highs this week, with the 30 year gilt climbing to its highest level in 27 years before easing slightly, now standing at 5.59 percent. Parallel moves have been seen in Germany, France, and the United States as investors grow wary of inflation and central bank policy. Yields rise when bond prices fall, reflecting the risk premium now demanded by investors.

Defined benefit pension funds, formerly stalwarts of demand for long dated UK government bonds, have largely withdrawn from the market, shifting dynamics and lessening the influence of the 30 year gilt in fiscal planning. The Office for Budget Responsibility references average 20 year borrowing costs in its forecasts, underscoring the shifting landscape for British public finance.

Governor of the Bank of England Andrew Bailey acknowledged the significance of market conditions on gilt sales, reiterating that while global factors are dominant, the bank’s own actions must be responsive to the current environment. Gilt and equity markets have witnessed a modest rally as sterling slipped 0.1 percent against the dollar and gained slightly versus the euro.

These developments underline the complexities facing the UK government as it navigates rising borrowing costs, strong global competition for capital, and evolving investor expectations.