Britain's 20-year borrowing cost tops 6% for the first time since 1998 as the bond selloff spreads

Britain's long-term borrowing costs climbed to levels last seen in 1998 on Thursday, as a jump in oil prices and a senior Federal Reserve official's call for more interest-rate increases pushed government bond yields higher on both sides of the Atlantic.

The yield on 20-year gilts topped 6% for the first time since 1998, and the 30-year yield rose as high as 6.05%, its highest since early that year. The 10-year yield, close to the maturities that carry much of Britain's new borrowing, touched 5.53%, the highest since July 2007 and above the 5.51% peak it set last week. All three were up about 7 basis points at their highs. Bond yields rise as prices fall.

Yields came off those levels later in the London session. At 1:32 p.m. in London (8:32 a.m. in New York), the 10-year gilt yielded 5.48%, the 20-year 5.95% and the 30-year about 6%, each still 2 to 3 basis points higher on the day.

Oil set the tone. Brent crude, the international benchmark, rose about 5% to around $105 a barrel, its highest since Sept. 29, after more attacks on shipping in the Gulf and concern that a hurricane could disrupt U.S. oil production. Higher energy costs feed inflation, which erodes the value of a bond's fixed payments, so investors demand higher yields to hold them.

Waller keeps more hikes on the table

In the U.S., the push came from a speech in Istanbul. Fed Governor Christopher Waller, speaking at a forum hosted by Türkiye's central bank, said the Fed will probably need to raise rates again. "If the economic data continue to come in as expected, I anticipate additional hikes to support a timelier return of inflation to our 2 percent goal," he said.

He also left room on timing. "The hikes do not need to come at consecutive meetings, but they should be in place in an acceptable period of time," Waller said. That leaves open a pause at the Fed's Oct. 27-28 meeting, after the central bank raised its benchmark rate by a quarter point to a range of 3.75% to 4% in September, its first move after nine months on hold.

Waller said core inflation, measured by the personal consumption expenditures index, was running at 3% over the 12 months to August and had been stuck between roughly 2.5% and 3% since the spring of 2024. Sixteen of the 18 Fed officials who submitted projections in September expected at least one more increase this year, he noted, and futures prices as of Wednesday implied an 85% chance of at least one hike by the end of the December meeting.

The 10-year Treasury yield rose as high as 5.35% and was at 5.32% at 8:32 a.m., up about 4 basis points and near its highest level since 2002. The 30-year yield was at 5.69% and the 2-year, which tracks expectations for Fed policy, at 4.81%. On Wednesday the Treasury sold $39 billion of 10-year notes at the highest yield for that auction since November 2000, and it sells 30-year bonds on Thursday afternoon.

Budget pressure builds in London

The timing is awkward for Chancellor of the Exchequer John Healey, who presents his first budget on Oct. 28 and is expected to raise taxes. Every increase in gilt yields adds to the interest bill on government debt of close to £3 trillion, and it eats into the room the Treasury has under its own borrowing rules.

The government is already paying more to borrow. On Sept. 8 it sold 30-year gilts at 5.82%, the highest rate on any gilt sale since the Debt Management Office was set up in 1998. Investors also expect the Bank of England to raise rates: markets put the chance of an increase at its Nov. 5 meeting at roughly 80%, with British inflation at 3.1% in August.

Europe's banks feel it too

In the euro zone, the selling was more uneven. Germany's 10-year yield rose about 3 basis points to 3.51%, while France's touched 4.97% early before settling near 4.88%, little changed, as worries about the French budget persisted. Bank of France Governor Emmanuel Moulin acknowledged that the country's economic situation was serious but said France did not need help from the European Central Bank.

Stocks took the strain. The Stoxx 600 index fell 1% early in the session to its lowest since June, and European bank shares dropped nearly 2%, with Deutsche Bank, Santander, Societe Generale and UniCredit falling for a second day. Higher bond yields raise banks' funding costs and make government debt a more attractive alternative to their shares.

What it means for borrowers

American home buyers were feeling the rise before Thursday. The average contract rate on a 30-year fixed mortgage rose to 7.49% in the week ended Oct. 2 from 7.3%, the highest in almost three years, according to the Mortgage Bankers Association, and mortgage applications fell 4.2%. Refinancing applications dropped 8%.