Investing.com – UK government bonds, known as gilts, sold off sharply last week, pushing related yields to their highest levels since 2008 and increasing pressure on the new government to Labor as it seeks to revive the UK’s moribund economy.

The benchmark 10-year yield rose as high as 4.9135%, up 8 basis points on the day, and climbed to levels not seen since August 2008.

British government bond yields have risen steadily since September, reflecting reduced expectations of a rate cut by the Bank of England, more borrowing in the new government’s October 30 budget and more US Treasury yields are high as President-elect Donald Trump is expected to maintain a loose fiscal policy and raise tariffs.

While yields are also rising in other major economies, such as the US, France and Germany, the UK appears to be ahead of the pace.

These higher yields are likely to prove a headache for UK chancellor Rachel Reeves, as the increased cost of servicing the country’s debt could mean she overshoots her medium-term borrowing targets when he updated the forecasts on March 26.

“We estimate that the rise in yields so far has left the government with slightly negative fiscal headroom against its deficit rule,” Goldman Sachs analysts said, in a note.

“Any further rise in yields and any slowdown in OBR growth on March 26 from here will push headroom further into negative territory. While the government may not need to act quickly in response to the OBR update, continued sell-off in gilt yields will increase pressure for corrective fiscal action.

In addition, higher yields are likely to act as an additional headwind to growth through household remortgaging and weaker investments.

“The rise in gilt yields reinforces our view that UK growth will falter in 2025, with our 0.9% real GDP growth forecast notably below consensus (1.4%), the BoE (1.5%) and the OBR (2%),” Goldman Sachs added.

That said, higher interest rates weighing on the growth outlook would call for more (rather than less) BoE rate cuts, all else being equal.

“A 25bp Bank Rate cut in February remains likely despite the gilt selloff,” Goldman added, “unless next week’s wages and inflation data surprise materially higher. After that we still see continued quarterly cut in the year because economic activity has failed.”