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The United Kingdom is facing its highest long-term borrowing costs in 27 years, driven by a combination of domestic fiscal pressures and global market trends. The yield on UK government bonds, or gilts, has surged as investors demand higher returns amid persistent economic uncertainty.

Domestic Fiscal and Economic Pressures

The UK’s joint current account and fiscal deficit remains a major concern for investors, creating upward pressure on borrowing costs. Persistent inflationary pressures—which have kept consumer prices elevated despite moderate economic growth—are fueling expectations that the Bank of England may maintain higher interest rates for longer.

Growth forecasts for the UK economy remain modest, limiting confidence in future fiscal stability and prompting lenders to seek higher premiums to compensate for risk.

Shift in Gilt Market Composition

Another factor contributing to higher long-term yields is a notable shift in gilt holders, with an increasing share now held by foreign hedge funds. These investors tend to demand higher returns to offset perceived risks, further pushing yields upward.

Global Trends Amplifying UK Borrowing Costs

The rise in global bond yields is also influencing UK borrowing costs. As governments worldwide contend with fiscal deficits and inflation, the demand for safe assets is changing, creating competition that drives yields higher.

Analysts warn that unless fiscal consolidation measures are introduced or inflationary pressures ease, UK borrowing costs may remain elevated, impacting government spending and investment plans.