UK borrowing overshoots ahead of the 28 October Budget

What happened

The UK government borrowed £24.5bn in September, more than forecasters expected. That takes borrowing for the first six months of the financial year, April to September, to £97.8bn. This is about £6bn more than the Office for Budget Responsibility, the official forecaster, projected in March.

The figures arrive a week before the Budget on 28 October, when the government sets out its tax and spending plans.

Why bond investors care

When a government borrows more, it sells more bonds. Investors then need a reason to buy them, and that reason is a higher yield. If they also start to doubt that the government will bring its deficit down, they demand extra compensation for the risk. Economists call this the term premium.

The UK 10-year gilt yield was about 5.4% on 21 October and eased to about 5.33% by 23 October. On 1 September it had reached 5.21%, at the time its highest level since 2008. It has since climbed higher.

Where it sits in the chain

This is one of the two outside forces on the chain: government finances feeding directly into link 4, long-term yields. It works separately from the Bank of England. Gilt yields can rise even when expectations for Bank Rate stay the same.

It also creates a feedback loop. Higher yields raise the interest the government pays on new debt, which adds to borrowing, which can push yields higher again.

What to watch

• How gilt yields react on Budget day. A credible plan to reduce borrowing can bring yields down; a plan investors doubt can push them up.
• The size of the government’s planned bond sales for the rest of the year.