UK's Borrowing Costs Hit Record Highs Since 1998 Amid Sterling Drop

On Tuesday, UK's 30-year borrowing costs soared to their highest since 1998, indicating heightened investor concern over Britain's financial health. Yields peaked at 5.69%, up five basis points from the previous day, marking the steepest level since May 1998.

The surge in borrowing costs exerted pressure on the sterling, which dipped 0.9% on the day, trading at $1.34. Against the euro, sterling softened by 0.5%, standing at 86.85 pence per euro. Finance Minister Rachel Reeves plans on tax increases in her autumn budget to stick to fiscal targets, raising economic growth challenges.

While global bond market sell-offs have impacted UK borrowing costs, Tuesday's simultaneous decline in sterling and gilts underscores focused concern over the UK's fiscal position. Jane Foley, Rabobank's head of FX strategy, noted that despite previous expectations favoring sterling, the currency faces fiscal risk vulnerabilities as the autumn budget looms.

(With inputs from agencies.)