A global decline in the value of government bonds has increased pressure on the UK's borrowing costs, complicating the budget preparations of John Healey, the new chancellor, set for next month. The yield — the rate of return — on 10-year UK government bonds, known as gilts, climbed to 5.38% by mid-morning on Thursday, nearing the 19-year high recorded last week. Higher yields mean the government must pay more in interest, increasing the cost of public investment and affecting forecasts from the Office for Budget Responsibility on whether the chancellor is on track to meet Labour’s fiscal targets. Analysts suggest recent yield increases have eroded over half of the £24bn financial cushion that former chancellor Rachel Reeves had built up during the spring statement in March. Healey has pledged to meet the rules with a buffer for uncertainty, but this is expected to be much smaller than £24bn. Rebuilding that cushion would likely require significant tax hikes or spending cuts, though Treasury officials insist the upcoming budget will be "focused," with major spending decisions delayed until a review next year. Investors have been selling government bonds across major markets in recent weeks, driven by fears of rising inflation and interest rates, exacerbated by ongoing tensions in the Middle East. The Bank of England’s chief economist, Clare Lombardelli, warned in a speech on Thursday that prolonged high oil prices due to the conflict could force the UK to raise interest rates further. She explained that if energy prices remain elevated, inflation expectations, wage negotiations, and pricing behavior could shift in ways that make inflation more persistent. In that case, the Bank may need to tighten monetary policy, unless there is clear evidence of falling inflation or reduced economic activity. Higher interest rates would increase mortgage costs for UK homeowners, creating a challenge for Andy Burnham’s government, which has promised to provide relief to consumers struggling with the rising cost of living. The Bank of England also anticipates a significant 24% increase in the energy price cap, which determines household utility bills, if oil prices stay high. Lombardelli’s remarks aligned with those of Bank governor Andrew Bailey, who noted that while high oil prices have not had as broad an impact on other prices as feared, the longer they remain high, the greater the risk of inflation becoming entrenched. The sell-off in bonds continued on Thursday, with yields on 30-year US Treasury bonds rising to 5.444%, the highest since 2004. Alongside concerns about inflation, investors are also wary of potential risks from unchecked US government spending and the impact of large-scale bond issuance by artificial intelligence firms, which may be reducing demand for government bonds.