Bank governor urges John Healey to use budget to allay market fears amid bond turmoil

Why has Bank of England governor Andrew Bailey urged Chancellor John Healey to produce a budget that reassures financial markets?

Andrew Bailey is urging John Healey to produce a budget that financial markets trust. The immediate concern is a sharp rise in UK government borrowing costs. Bailey said fiscal policy must be credible and seen as credible by investors, whatever its overall direction. That matters because investors can demand higher returns when they fear excessive debt or weak economic management.

The pressure is visible in gilt yields. The 10-year yield reached 5.515%, while longer-term yields also hit historical highs. Economists estimate that higher borrowing costs and weaker growth may have erased about half of the £24bn fiscal buffer built in March. Healey is expected to raise taxes partly to rebuild that cushion.

The budget is due on 28 October. Bailey said realistic commitments to restrain debt are especially important during shocks, such as the outbreak of the Iran war. However, economist Andrew Wishart warned that excessive tax increases could damage economic incentives if gilt yields later fall.

What are government bonds, or gilts, and what does their yield represent?

A government bond is a security issued to raise money from investors. The government receives funds and promises payments over time, including repayment of the original amount. In the UK, these government bonds are called gilts. The yield is the return, or interest rate, associated with holding the bond at its current market price.

The article highlights 10-, 20- and 30-year gilts. Their yields show what investors demand for lending to the UK over those periods. The 10-year yield reached 5.515%, while 20- and 30-year yields climbed to levels not seen since as long ago as 1998. Yields and prices move in opposite directions.

These figures matter because they affect the government's future financing costs. Higher yields mean new borrowing is more expensive. They also influence borrowing costs elsewhere, including for homeowners and businesses. Investors' willingness to buy or sell gilts can therefore affect the wider economy, not just government accounts.

How high did the UK’s 10-year gilt yield rise, and why was reaching 5.515% historically significant?

The yield on 10-year UK government bonds rose 0.06 percentage points to 5.515% by lunchtime in London. This is the interest rate linked to government borrowing over a decade. The move was significant because it took the yield to its highest level since July 2007.

That date places the increase near the beginning of the global financial crisis, when financial markets were already showing severe strain. The article also reports that 20- and 30-year gilt yields reached their highest levels since as long ago as 1998. Yields later fell back, showing how volatile trading had become.

The high yield increased pressure on Chancellor John Healey before his 28 October tax and spending announcement. Higher yields raise the cost of government borrowing and may reduce the fiscal cushion available for policy decisions. Economists estimated that rising costs and weaker growth could have wiped out around half of the £24bn buffer built in March.

Why do bond yields rise when bond prices fall, and what does that reveal about investor demand?

Bond yields and prices move in opposite directions because a bond's promised payments do not usually change when it is traded. If the market price falls, the same future payments represent a larger return compared with the amount paid. If the price rises, those payments represent a smaller return, so the yield falls.

For example, investors selling existing gilts push their prices down. Buyers then require a higher yield to hold them. The article describes investors offloading government bonds previously viewed as safe havens, amid fears of rising inflation. That selling helped drive UK yields sharply higher, including the 10-year rate reaching 5.515%.

This price movement reveals changing investor demand. Heavy selling suggests investors want compensation for inflation, economic or fiscal risks, or may prefer other assets. The article links the recent selloff to international factors, higher oil prices and worries about government spending. Volatile trading later pushed yields down again, but analysts expected renewed pressure if Middle East conflict worsened.

How do higher government bond yields increase borrowing costs for governments, homeowners and businesses?

Government bond yields are a benchmark for the cost of borrowing over different periods. When yields rise, governments generally pay more to issue new debt or refinance maturing debt. That increases interest spending and leaves less money for public services, tax cuts or other policies.

The article reports that the UK 10-year yield reached 5.515% and that longer-term yields also rose sharply. Economists believe these higher costs, combined with weaker growth, may have erased about half of the £24bn fiscal buffer built in March. The effect is not limited to the Treasury. Higher yields push up borrowing costs for indebted governments and create knock-on effects for homeowners and businesses.

For households, this can mean more expensive mortgage borrowing, while companies may face higher costs for loans and investment. The article does not quantify those changes, but it identifies the transmission clearly. Continued market pressure would make Healey's budget choices harder and could further weaken the economic outlook.

Why can credible plans to control government debt make investors accept lower returns on government bonds?

Investors demand a return for lending to governments. That return can be lower when they believe public finances are being managed credibly. A realistic plan to rein in debt reduces fears that borrowing will surge or that fiscal policy will become unstable. Stronger confidence can support demand for government bonds and limit pressure on yields.

Bailey made this point after the bond rout increased UK borrowing costs. He said credible fiscal policy matters especially when negative shocks occur, such as the outbreak of the Iran war. If investors expect debt to remain under control despite such shocks, they may be less likely to sell bonds or demand a large extra return.

The budget on 28 October will therefore be judged partly by its debt commitments. Healey is expected to raise taxes to rebuild some fiscal headroom, but Andrew Wishart warned against raising taxes merely to restore the March surplus. He said excessive tax rises could damage economic incentives if yields fall over the following year.

How can oil-price shocks, inflation expectations and central-bank interest-rate decisions push up long-term government bond yields across many countries?

Long-term government bond yields reflect what investors expect about inflation, interest rates and government borrowing. A jump in oil prices can raise costs across economies, increasing fears that inflation will persist. Investors then seek higher bond returns to protect against losing purchasing power, pushing existing bond prices down and yields up.

Central banks can add pressure by raising interest rates to fight inflation. The article says the Bank of England is widely expected to raise rates in November, echoing moves by the European Central Bank, Federal Reserve and Bank of Japan. Investors currently expect four Bank of England rate rises. Expectations of tighter policy can make longer-term bonds less attractive unless their yields increase.

These forces have affected major economies simultaneously. The article links the recent bond selloff to soaring oil prices and the unresolved Middle East conflict. France has been hit particularly hard, but the selloff is widespread. Further conflict could push yields higher if inflation becomes embedded across major economies.

Key Facts:

📌 The UK 10-year gilt yield reached 5.515%.

📌 Bailey said fiscal policy must be credible to financial markets.

📌 Economists estimate about half of the £24bn buffer may have disappeared.

📌 UK government bonds are known as gilts.

📌 The 10-year gilt yield reached 5.515%.

📌 Yields go up when bond prices go down.

📌 The 10-year gilt yield reached 5.515%.