The auction of British 10-year treasury bonds begins today: 5.41% may drop, and the auction yield is likely to hit a new high since 1999

The Zhitong Finance App learned that the British government will pay the highest yield since 1999 in an upcoming 10-year bond auction, as investors demand additional premiums to compensate for continued inflation and possible spending increases in next month's budget.

The UK Debt Management Office (DMO) plans to sell up to £4.25 billion (US$5.6 billion) of bonds with 4.875% dividends due in July 2036 on Tuesday. The sale of the same securities last month recorded an average yield of 5.16%, the highest level in nearly 20 years.

Since then, the 10-year UK bond yield climbed further and hit a 19-year high of 5.38% on Monday. On Tuesday, the yield was 5.41%.

The sharp rise in British Treasury yields is part of the rise in global borrowing costs, as high energy prices heighten market concerns that inflation will remain high for a longer period of time, thus forcing central banks to further tighten their policies. Furthermore, the market is also concerned about the huge scale of public borrowing and the resulting rise in debt repayment burdens.

Richard Carter, head of fixed income research at Quilter Cheviot Limited, said, “Lending data remains extremely challenging, and the situation in the Middle East shows no sign of abating, so energy costs will remain high.” “Unless growth prospects change suddenly, the desire for fiscal discipline may be dashed.”

The UK may pay the highest interest rate for 10-year loans since 1999

In the UK, traders expect the Bank of England to raise interest rates in November, and have set a rate hike as many as five times before the end of 2027.

Meanwhile, the October 28 budget will be a high-risk moment for Chancellor of the Exchequer John Healy; he has been trying to reassure investors that Prime Minister Andy Burnham's administration will maintain strict control over the spending money bag. On Monday, he spared no effort in his first budget to commit to implementing fiscal restraints.

Despite this, higher yields are still attracting some investors to buy. Last month's 10-year auction was oversubscribed by more than 3.6 times, the strongest demand since April 2020. UK treasury bonds may also be supported by the Bank of England's decision to suspend the quantitative austerity (QT) program and not sell long-term bonds to the market.

Bidding for this bond auction will close at 10 a.m. London time, and the results will be announced later.