UK gilt auction snub lifts borrowing costs ahead of Autumn Budget

Borrowing costs rose on Thursday after an auction of UK government bonds was largely snubbed by global investors, marking another setback for Chancellor Rachel Reeves ahead of November’s Autumn Budget. The Debt Management Office sold £1.25 billion of gilts maturing in 2034, at an average yield of 4.584%, with a yield at auction of 4.5% and a bid-to-cover ratio of 2.9. In July, the same issue drew a bid-to-cover of 3.32 and an average yield of 4.553%.

Gilt yields extended their gains across the curve, with the 10-year up five basis points and the 30-year up five basis points. The 10-year stood around 4.72%, while the 30-year traded near 5.54%. Over the past 12 months, 10-year yields have risen about 73 basis points and 30-year yields about 97 basis points. The results come as gilt yields have moved higher after earlier declines, with government borrowing widening expectations and the Bank of England dampening hopes for further rate cuts next year.

The auction underscored growing investor skepticism about Reeves’ fiscal plan. "The auction result shows investors are losing patience with uncertainty," said Lale Akoner, global market analyst at eToro. "The market is far from convinced by Reeves’ plans, meaning volatility could persist until the Budget provides clarity." He added: "The Budget will need to deliver credible fiscal tightening, otherwise the UK risks testing investor confidence further. For income-focused investors, high yields may be tempting, but the risk is that further fiscal slippage pushes borrowing costs even higher."

Tony Whincup, head of investment specialists at TrinityBridge, said: "Despite tax receipts increasing, higher spending and debt interest costs outstripped the higher income. Public finance data can be volatile on a month-to-month basis, meaning such upward pressure may not persist into the medium to longer-term. However, the latest data is likely to further heighten the need for tax hikes if the Chancellor is to sufficiently plug the fiscal hole to keep to her self-imposed rules."

Kate Marshall, lead investment analyst at Hargreaves Lansdown, added: "The government is currently under pressure to borrow more, and we could see spending promises in areas like energy and infrastructure. This could mean more gilts being issued in the years ahead. Meanwhile, inflation, currently at 3.8%, is still above the BoE’s 2% target. This makes life harder for both the government and the BoE. Cutting interest rates or increasing spending could help stimulate the economy, but risk fuelling inflation. And holding back could keep inflation in check, but stifle growth."

Inflation remains above the Bank of England’s 2% target at 3.8%, and growth shows signs of stagnation, complicating policy for both the government and the central bank. The Bank has damped hopes for further rate cuts next year, keeping pressure on gilt markets as traders weigh the path of fiscal consolidation against near-term macro data. As the Autumn Budget approaches, analysts say credibility and clarity on fiscal plans will be pivotal to stabilizing investor confidence and helping gilt markets regain composure.