UK borrowing costs have been climbing in recent days as investors have braced for the budget in a little over three weeks' time. Traders have been selling UK bonds, known as gilts, which pushes up the yield (or date of return) on the debt. As a result, the gap between UK and German borrowing costs has now reached its widest since summer 2023, and is approaching the levels seen during the mini-budget panic of 2022. The yield on 10-year UK government gilts has now risen to 4.2%, its highest level since the general election three months ago.Notably, that’s higher than the US – which pays around 4% to borrow for a decade – as well as Germany, where 10-year bunds yield just 2.2%. Rising borrowing costs reduce the amount of headroom the government has to tweak tax and spending plans while still meeting its fiscal rules – to have debt falling in five-years time, and to balance day-to-day expenditure with tax receipts. The City is anticipating that Rachel Reeves may adjust the UK’s fiscal rules, to give herself more headroom to fund investment projects. Such a move could lead to higher government borrowing than expected. Reeves must decide by Wednesday whether to do this, and potentially unlock up to £57bn in additional spending on infrastructure at this month’s budget. Meanwhile, water companies in England and Wales are to pay a £157.6m penalty to customers after missing key targets on reducing pollution, leaks and supply interruptions. Water regulator Ofwat has announced the move in its annual company performance report, which has also found that customer satisfaction has fallen to its lowest level since the measure was introduced in 2020-21. Ofwat said the £157.6m rebate will be taken off bills for households and businesses in 2025-26. The agenda • 7am BST: German industrial production data for August • 8am BST: Kantar grocery inflation data for September • 1.55pm BST: Redbook index of US retail sales We’ll be tracking all the main events throughout the day ...
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