UK 10-year gilts go on sale today: may close at 5.41%, auction yield could hit highest since 1999.

The UK government will pay its highest yield since 1999 in an upcoming 10-year bond auction, as investors demand an extra premium to compensate for persistent inflation and possible spending increases in next month's Budget. The Debt Management Office plans to sell up to 4.25bn ($5.6bn) of bonds maturing in July 2036 with a 4.875 per cent coupon on Tuesday. Last month's sale of the same security recorded an average yield of 5.16 per cent, already the highest in nearly two decades. Since then, 10-year gilt yields have climbed further, hitting a 19-year high of 5.38 per cent on Monday. On Tuesday, the yield stood at 5.41 per cent. The surge in gilt yields is part of a global rise in borrowing costs, as high energy prices intensify market concerns that inflation will remain elevated for longer, forcing central banks to tighten policy further. In addition, markets are worried about the scale of public borrowing and the resulting rise in debt-servicing costs. Richard Carter, head of fixed income research at Quilter Cheviot Limited, said, "The borrowing data remains extremely challenging, and there is no sign of any de-escalation in the Middle East, so energy costs will remain high." "Unless the growth outlook suddenly changes, the desire for fiscal discipline may go unfulfilled." UK may pay highest 10-year borrowing rate since 1999 In the UK, traders expect the Bank of England to raise rates in November and have priced in as many as five rate rises by the end of 2027. Meanwhile, the October 28 Budget will be a high-stakes moment for Chancellor John Healey; he has been trying to reassure investors that Prime Minister Andy Burnham's government will maintain strict control over the purse strings. On Monday, he spared no effort in his first Budget to pledge fiscal restraint. Nevertheless, higher yields are still attracting some investors to buy. Last month's 10-year auction was more than 3.6 times oversubscribed, the strongest demand since April 2020. Gilts could also be supported by the Bank of England's decision to pause its quantitative tightening programme and stop selling long-term bonds into the market. Bids for this bond auction will close at 10am London time, with the results announced shortly afterwards.