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The Bond Market Got to Healey's Budget First
— 4 mins read
The American ten-year Treasury yield hit 5 per cent this month, a level it last touched in 2007. Everything else is priced off that number, including your mortgage and the Chancellor's Budget.
Merely two days ago, the yield on the ten-year US Treasury reached 5.00 per cent, a level it had not seen since July 2007. Yesterday, the Federal Reserve raised interest rates by a quarter point from 3.75 to 4.00 per cent, its first increase in three years, on a unanimous vote. Those two facts are the story. Everything else is weather.
Start with what a yield is, because the word hides a lot. A government bond is a loan. When a country borrows it sells a promise to repay, and the yield is what lenders demand in return. Rising yields mean lenders are asking for more. It is the price of a government's credibility, set daily, in public, by people with no particular loyalty to any flag.
America sets the price
The US Treasury market is the reference point for almost every other bond on earth. When American borrowing costs rise, everyone else's rise with them, because every other government is competing with Washington for the same money.
And Washington is borrowing on a scale that is difficult to hold in the head. The United States ran a $1.8 trillion deficit in the first ten months of the 2026 financial year, more than it borrowed in the whole of 2025, and is on course to pass $2 trillion. In July alone it borrowed $14 billion a day.
Pictured above: The Federal Reserve Board in Washington DC. Rates rose here on 16 September, and the rest of the world followed.
Japan pulled away the prop
Then, on 1 September, the yield on Japan's ten-year government bond touched 3 per cent for the first time since 1996.
For thirty years Japanese savings had nowhere useful to go. Domestic bonds paid almost nothing, so Japanese banks, insurers and pension funds sent their money abroad. Japan still holds around $1.1 trillion of US Treasuries, the largest foreign holding in the world. At 3 per cent, that money has a reason to stay at home, and America has to find someone else to lend to it. Someone else always wants a better price.
Europe felt it within days
German thirty-year debt hit its highest level since 2011. French ten-year yields reached a peak last seen in November 2008. The European Central Bank raised rates to 2.5 per cent on 10 September, its second rise this year, with eurozone inflation at 3.3 per cent and energy costs up 14.3 per cent.
France is the warning. Public debt reached €3.5 trillion in the first quarter, 117.5 per cent of GDP, and the gap between French and German borrowing costs widened to 87 basis points by 5 September, a level last seen during the euro crisis. Foreign investors now hold 57.5 per cent of French government debt.
Britain pays the most
British borrowing costs are the highest in the G7. Thirty-year gilts touched 5.89 per cent at the start of September, a twenty-eight-year high, and the ten-year sits around 5.25 per cent, a level last seen in 2008.
The Bank of England held rates at 3.75 per cent on Thursday, but three of its nine members voted to raise, with inflation at 3.1 per cent and fuel 23 per cent dearer than a year ago. It also confirmed it will run its gilt holdings down to zero by September 2034, selling roughly £20 billion a year into the market. For fifteen years the largest and least fussy buyer in the gilt market was the Bank of England. It is now a seller.
What this does to you
Fixed-rate mortgages are priced off gilt yields, not off the Bank's headline rate, which is why a mortgage offer can get worse in a month when the Bank has not moved at all. The interest the state pays on its own debt comes from the same pot as schools, defence and the health service, so every rise in yields arrives eventually as a tax rise or a spending cut. There is no third option and there never was.
John Healey delivers his first Budget on 28 October. Before he has taken a single decision, higher borrowing costs have cut his headroom from around £26 billion to roughly £14 billion. Half his Budget has been written for him by people in New York and Tokyo who have never heard of him.
Half his Budget has been written for him by people in New York and Tokyo who have never heard of him.
The era is not coming back
There is a comfort on offer, and it is false. It says this is a blip, that yields will drift back down, that the decade of nearly free money was the normal state of things.
It was not normal. It was the most unusual period in the history of government borrowing, and it is finished. The question facing Britain is not how to get back to it. Governments borrowed as though cheap money would last. So did businesses. So did anyone who took a mortgage when rates started with a one.
