UK borrowing costs hit decades-high levels as oil surges

Government bond yields climbed sharply this week amid growing investor anxiety over the geopolitical crisis and its implications for inflation.

The sell-off in UK debt has been particularly severe, raising fears that Mr Healey will need to take drastic action to rein in the country’s swelling debt burden.

On Thursday, the two-year gilt yield leapt 14 basis points to reach 4.72 per cent. The benchmark 10-year yield rose 10 basis points to 5.3 per cent, while the 30-year yield gained six points, creeping towards the six per cent threshold last seen in 1998.

Kathleen Brooks, research director at XTB, said: "Although the move higher in bond yields is a global phenomenon caused by an energy price shock, the fact that UK bond yields are rising at a faster pace than elsewhere, suggests that there is a specific risk premium attached to UK debt right now."

Ms Brooks’s assessment points to a market increasingly wary of Britain’s fiscal position relative to other major economies.

Brent crude, the international oil benchmark, surged above $100 a barrel on Wednesday for the first time since July, with prices climbing nearly four per cent in a single session.

The jump fuelled concerns that both the Bank of England and the Federal Reserve could be forced to raise interest rates.

Ms Brooks warned that if oil continued to push further into triple-digit territory, "this would transform next month’s Budget into an emergency Budget to plug fiscal holes."

She added: "Tax rises under the Labour government are nothing new, but Healey and co. may also be forced into huge welfare cuts to bring borrowing down and pay the debt interest bill.

"Andy Burnham may have tried to protect welfare spending this week, but his hopes and dreams are meeting the reality of the bond vigilantes who keep pushing UK yields to multi-year highs."

Mr Healey has remained tight-lipped about what his inaugural Budget will contain, though the fiscal statement is scheduled for October 28.

The Chancellor has notably declined to rule out additional tax increases, signalling further potential pain for both businesses and taxpayers.

Investors are now turning their attention to upcoming economic data for clues about how the global economy is weathering the conflict.

UK growth figures and US inflation statistics, both expected at the end of this week, will be closely scrutinised for signs of the toll that rising energy costs are taking on the world’s largest economies.