UK bond yields hit fresh 19-year high, adding to pressure on Healey

LONDON, Sept 2 (Reuters) - British government bond yields hit their highest since the global financial crisis on Wednesday, tracking a global sell-off caused by the Iran war and adding to the challenges facing finance minister John Healey ahead of his first budget next month.

The yield on 10-year gilts peaked at 5.294% on Wednesday, the highest since August 2007, shortly after 0900 GMT before easing back after Prime Minister Andy Burnham said his government would stick to its fiscal rules.

"We are taking the action needed to get debt down," Burnham told lawmakers in parliament.

"This will be a government grounded in fiscal responsibility. It will stick to the fiscal rules, but at the same time, we will help reduce cost of living pressure on our constituents, and that's the approach that we will take."

RISE IN BORROWING COSTS

The rise in borrowing costs was largely in line with rising borrowing costs for other European governments as investors worried about the inflationary impact of rising oil prices caused by the resumption of conflict in the Gulf.

Economists at Pantheon Macroeconomics said the jump in gilt yields had sharply reduced Healey's margin of error for hitting the government's targets for improving the public finances.

"Higher interest costs cut fiscal headroom to about £13 billion ($18 billion), from £23.6 billion in the Spring Statement," they told clients in a note.

"The chancellor needs to raise taxes or reduce spending by £11 billion per year just to get the thin margin of headroom back to where it was. Markets will be on edge as the budget approaches and the government keeps making spending commitments."

Healey will deliver the first budget under Burnham, who became prime minister in July, on October 28.

Jim O'Neill, a former Goldman Sachs economist and an informal adviser to Burnham, said further rises in borrowing costs would force the government into spending cuts.

"The penalty of the debt servicing cost and the knock-on effect to other markets including mortgage rates will be too severe for a government to resist," O'Neill told Times Radio.

Longer- and shorter-dated borrowing costs also rose on Wednesday. Five-year gilt yields hit their highest since September 2023 while 30-year bond yields briefly hit a nearly three-decade high.

($1 = 0.7404 pounds)

(Reporting by Suban Abdulla; Additional reporting by Muvija M and Andy Bruce; Editing by William Schomberg and Barbara Lewis)