A global sell-off in government bonds has driven up UK borrowing costs ahead of Chancellor John Healey's budget next month. The yield on 10-year UK government bonds (gilts) has risen to 5.38%, approaching a 19-year high, as investors retreat from bonds over concerns about higher inflation and interest rates stemming from the Middle East conflict. This increase raises the upfront cost of government investment and significantly constrains the chancellor's fiscal flexibility to meet Labour's fiscal rules.

Analysts estimate the recent yield rises have eliminated more than half of the £24bn budgetary headroom that was available in March. The Bank of England has warned that prolonged high oil prices from the conflict increase the likelihood of interest rate rises, which would raise mortgage costs for homeowners and are expected to drive a 24% increase in the energy price cap in January. The bond sell-off is a global phenomenon, with US Treasury yields also hitting their highest level since 2004, reflecting broader investor concerns about inflation and government spending.