Why are UK borrowing costs rising and what does it mean for me?

UK government borrowing costs have been rising, with some now at their highest level since 1998 as investors around the world worry about inflation.

Why is this happening and how does it affect you?

What's happening in the bond markets?

A bond is a bit like an IOU that can be traded in the financial markets.

Governments generally spend more than they raise in tax so they borrow money to fill the gap, usually by selling bonds to investors.

As well as eventually paying back the value of the bond, governments pay interest at regular intervals so investors receive a stream of future payments.

UK government bonds - known as "gilts" - are normally considered very safe, with little risk the money will not be repaid. They are mainly bought by financial institutions, such as pension funds.

Interest rates - known as the yield - on government bonds have been going up, with the yield on a 10-year bond at its highest level since 2008, while the yield on a 30-year bond is at its highest since 1998, meaning it costs the government more to borrow over the long term.

This comes at a sensitive time for new PM Andy Burnham and Chancellor John Healey as they prepare for their first budget on 28 October.

The government's ability to play with the public finances is limited by the so-called fiscal rules it has set for itself.

So, if it needs more money to pay back higher borrowing costs, it has less to spend on other things (under its self-imposed rules).

The possibility now looms of less support for households struggling with the cost of living, or of tax rises to pay for any support.

Importantly, these are choices – not certainties – so the chancellor might free up some money by spending less elsewhere.

Some may be wondering about the impact of higher gilt yields on the mortgage market, particularly after what followed Liz Truss's mini-Budget in September 2022.

Analysts believe that mortgage rates could go up on new fixed deals, as funding costs for lenders rise. But this is very different to 2022, when they shot up over a couple of days.

That speedy rise led to lenders quickly pulling deals while they tried to work out what interest rate to charge.

However, the market could be more favourable to anyone currently buying an annuity - a product from an insurance company that gives a retirement income for the rest of their life, bought only once.

Why are bond yields rising?

Yields are rising not just in the UK. Borrowing costs have also been going up in the US, Japan and Europe

Investors worry that events in the Middle East mean high oil prices, and rising inflation in general, will persist.

If inflation is high, then the purchasing power of fixed payments is diluted. So, investors demand a higher yield as compensation, and sell off their bonds.

Investors are also increasingly concerned about high levels of government borrowing, while there has been greater demand for loans from big tech companies hoping to fund investment in AI - driving up competition and increasing the interest rate lenders demand.

When will interest rates fall?

Why are prices rising in the UK?