Falling gilt yields suggest UK borrowing cost ‘premium’ may be coming to an end, finds IPPR analysis

• UK borrowing costs had increased by 0.4 to 0.8 percentage points more than major peers since the 2024 election 

• But 10, 20, and 30-year gilt yields have all fallen sharply in recent months 

• IPPR urges government to stay the course and prioritise reassuring markets on fiscal credibility 

The steadily rising premium added to UK borrowing costs since Labour took office in 2024 is showing signs of unwinding, according to new analysis by IPPR. 

The government had faced uniquely high borrowing costs, compared to its peers. UK yields had increased by 40-80 basis points more than its competitors since the election, costing the exchequer between £2bn-£7bn a year. 

At its peak, government borrowing costs were six times more expensive than pre-pandemic, and 30-year borrowing costs had risen by 4.1 percentage points since 2022 – 150 basis points more than the US and 100 basis points more than the Eurozone. 

However, 10-, 20- and 30-year borrowing costs have fallen by 20 basis points more than comparative countries since Rachel Reeves' speech at Labour party conference, highlighting that the UK premium may finally be coming to an end. 

The reasons for this premium are not straightforward, especially given that the UK's economic fundamentals are stronger than those of many countries with lower borrowing costs. The UK's debt-to-GDP ratio is 101 per cent, compared with 122 per cent in the US and 237 per cent in Japan, and the government is planning to halve the amount it borrows each year by the end of this parliament. This suggests the problem may be less about the policy plans themselves and more about whether markets believe they will be delivered. 

The report authors highlight a few potential reasons for high borrowing costs in the UK, including: 

• Uncertainty about whether the government will credibly deliver on its fiscal plans 

• The Bank of England's Quantitative Tightening programme, selling government bonds faster and at far higher rates than other central banks 

• The exit of UK defined benefit pension schemes, shifting reliance to international investors to buy government bonds 

While the premium has steadily increased in the last year, this problem had been brewing for some time. The premium first spiked following Liz Truss' disastrous mini-budget which coincided with borrowing costs around the globe sharply increasing. 

However, confidence is clearly growing in the government as borrowing costs have been falling since September 2025. Government borrowing is on track to halve over the course of this parliament. This is making the UK's coming fiscal consolidation the fastest in the G7, which has led to the IMF giving the UK's fiscal policy its blessing, saying the UK's “fiscal plans strike a good balance between supporting growth and safeguarding fiscal sustainability.”   

The UK is on track to spend £92bn on interest payments on its debt this year – about 7.5 per cent of government receipts. The authors of the IPPR report say that continuing to assure markets could save the Exchequer billions of pounds in reduced borrowing costs. They recommend: 

• Sticking to the current set of fiscal rules, to reassure the markets and prove credibility 

• Pausing the Bank of England's active gilt sales as part of quantitative tightening to reduce the UK premium 

• Strongly reducing issuance of long dated gilts, and making the Debt Management Office shift reliance towards medium-term debt 

William Ellis, senior economist at IPPR, said: 

"The premium on UK borrowing costs appears to be easing, showing that markets are responding to growing confidence in the government's fiscal approach. Sticking to its fiscal plans could save the Exchequer billions and free up fiscal space in the future." 

Carsten Jung, associate director for economic policy at IPPR, said 

“The UK is paying more than other major economies to borrow. To be clear, we're not at risk of going broke — but investors are unsure how to price UK debt because they don't know how much more borrowing is coming down the line. 

“With clear, credible fiscal plans, the UK could be a star performer in the G7 — and simply reassuring markets that we'll stick to those plans could save billions. 

“The Bank of England also needs to pull its weight. Actively selling government bonds is adding unnecessary pressure to the gilt market. It should stop — just as every other major central bank has.” 

ENDS 

NOTES TO EDITORS 

• Analysis of the UK bond premium is based on a comparison of long-term UK Gilt yields against sovereign debt benchmarks in the US (Treasury yields) and the Euro Area (AAA-rated bonds). The analysis is also informed by market measures of investor sentiment including inflation and interest rate expectations.