Submitted by Bill Fernie
27th September 2026
America Has a Bond Problem. Britain Has One Too – Why Governments Can't Simply Push Interest Rates Down
Governments have considerable power over economies, but there is one market they cannot completely control.
The bond market.
That is becoming increasingly important in both America and Britain.
In the United States, Treasury Secretary Scott Bessent has been trying to bring down longer-term government borrowing costs. The US Treasury has increased its programme of buying back government bonds, partly in an attempt to improve market conditions and support bond prices.
But the response from investors has been less enthusiastic than Washington might have hoped.
A $6 billion Treasury buyback did not stop yields rising, with investors continuing to focus on America's huge government debt, persistent inflation pressures and the amount of new debt the government needs to issue.
The underlying lesson is fairly simple.
A government can influence the bond market, but it cannot simply order investors to lend it money cheaply.
Britain faces a similar problem
This matters to Britain because the UK government is facing many of the same pressures.
The cost of government borrowing has been rising. In September, Britain sold 30-year government bonds at the highest yield recorded for comparable borrowing since 1998.
That is particularly awkward for Chancellor John Healey because he is preparing for the Budget on 28 October.
The government's fiscal position has already deteriorated.
Public sector borrowing in August was £18.3 billion, considerably above the £15.5 billion expected by economists. Borrowing during the first five months of the financial year reached £77.3 billion, £8.1 billion more than the Office for Budget Responsibility had forecast.
Reuters reports that the combination of higher borrowing costs and inflation has reduced the government's estimated fiscal headroom from around £24 billion in March to roughly £10 billion.
That is a significant change before the Chancellor has even delivered his Budget.
Why bond yields matter
It can be tempting to think that government borrowing is rather abstract.
It isn't.
When the government sells gilts, it is borrowing money from investors. The yield on those gilts determines how much it costs to service that borrowing.
Higher yields therefore mean higher costs for the government.
And Britain already has a substantial debt interest bill.
This creates an awkward situation for any Chancellor.
More borrowing can allow the government to spend more today, but if investors demand higher interest rates to finance that borrowing, some of the benefit can eventually be swallowed by higher debt-interest payments.
It can become a vicious circle.
Higher inflation can mean higher interest rates. Higher interest rates can contribute to higher gilt yields. Higher gilt yields increase government borrowing costs. Higher borrowing costs leave less money available for public services and investment.
Inflation makes things even harder
The Bank of England is facing its own problem.
It kept Bank Rate at 3.75% in September, while warning that UK inflation had risen to 3.1% in August and could rise further because of higher energy prices resulting from the conflict in the Middle East. Three members of the Monetary Policy Committee actually voted for a further increase to 4%.
This creates a difficult environment for the Chancellor.
If inflation remains stubbornly high, the Bank of England cannot simply cut interest rates to make borrowing cheaper.
And the government cannot simply force gilt yields lower either.
The people buying government debt ultimately decide what return they require.
The Budget becomes a balancing act
This makes the 28 October Budget particularly important.
The Chancellor has to demonstrate that the government can control its finances while continuing to fund public services, investment and its other commitments.
But raising taxes can affect households and businesses.
Cutting spending can create political and practical difficulties.
Borrowing more can increase the government's exposure to higher interest rates.
And allowing the fiscal position to deteriorate too far could make investors increasingly nervous.
The September outlook from the House of Lords Library warned that rising borrowing costs could reduce the government's headroom against its fiscal rules.
This is why the Budget is not simply about finding enough money to pay for the government's plans.
It is also about convincing the people who lend Britain money that those plans are financially sustainable.
America offers a useful warning
The American experience illustrates the limits of government intervention.
Bessent can use the Treasury's enormous financial resources to buy bonds, but investors are looking at the much bigger picture: America's debt, future borrowing requirements, inflation and the economic consequences of geopolitical uncertainty.
Britain is in a different position. The US dollar has a unique international role and US Treasury securities are central to global financial markets.
But the basic principle is the same.
Bond investors ultimately look beyond the immediate government announcement.
They look at the numbers.
What should we watch on 28 October?
For ordinary households, the most important parts of the Budget may therefore not be the headline tax announcements.
The bigger questions will include how much the government expects to borrow, whether its fiscal rules remain credible, what assumptions are being made about economic growth and inflation, and whether the OBR believes the plans are sustainable.
There is also the question of what happens to gilt yields after the Budget.
If investors believe the government's plans improve the long-term position, borrowing costs could respond favourably.
If they believe the government has simply added more commitments without a convincing way of paying for them, the opposite could happen.
That is the difficult lesson from both America and Britain.
Governments can set taxes, spending and borrowing plans. They cannot set the price at which the rest of the world is willing to lend them money.
And for Chancellor Healey, that makes the 28 October Budget rather more than a political event.
It will also be a conversation with the bond market.