Global bond sell-off deepens on fears US economy is overheating

A global sell-off in government bonds has deepened, dragging UK government debt along with it, as investors grow increasingly concerned that the US economy may be running hotter than expected.

The yield on 10-year UK gilts jumped around 1.8% in the latest trading session, pushing it toward its highest level since the 2007 financial crisis. Yields rose a further 10 basis points on Thursday to 3.075%, marking the highest level for the benchmark since 1996, following a three-day trading break.

Other maturities also moved higher, with five-year and 20-year gilt yields each gaining roughly 10 basis points, reaching 2.375% and 3.915% respectively. Rising yields translate directly into higher borrowing costs for the UK government, both for servicing existing debt and issuing new bonds.

The increase in borrowing costs is complicating the government's fiscal planning, as officials weigh how much financial headroom to maintain against its self-imposed fiscal rules. According to people involved in internal discussions, estimates of the appropriate buffer have varied, with some suggesting a headroom of around £15bn would suffice while others have proposed a figure closer to £20bn; no final target has reportedly been settled on yet.

Some government figures are said to be preparing arguments that maintaining the buffer set out in March is no longer necessary, given that borrowing costs and energy prices have both risen sharply since then. The bond market moves are being closely watched as a barometer of investor confidence in both UK and US fiscal and monetary conditions.