City analysts are sounding the alarm over a potential UK recession that could dwarf the scale of recent financial crises if American borrowing costs keep rising.
The warning follows a dramatic auction of 30-year US Treasury bonds, which saw investors demand yields as high as 5.22 per cent on a $25bn sale.
That figure represents the highest borrowing cost on long-dated US debt since August 2001, well above rates seen at the auction held just before Donald Trump’s second term began.
The US Treasury department confirmed the results, which have reignited deep concerns about America’s widening deficit and persistent inflationary pressure pushing bond yields ever higher.
America’s total debt pile has now swelled to a record $40 trillion, roughly double the levels recorded just a decade ago, compounding fears over long-term fiscal sustainability.
Trump’s administration has seen the deficit climb sharply following sweeping tax cuts that the Elon Musk-run Department of Government Efficiency was unable to offset through reductions in state spending.
Roger Lee, head of equity strategy at Cavendish, warned that any rout in the Treasury market would be “very bad” for the UK, with higher mortgage costs and corporate debt interest choking an already stagnant economy.
“A recession either as a result of first order effects of increased debt servicing costs or a fiscal consolidation forced by a gilts crisis would be likely,” Lee said, adding: “The economic pain in peripheral Europe and Asia during their debt crises was profound.”
Helen Thomas, chief executive of Blonde Money, cautioned that deteriorating conditions in US bond auctions could seize up the entire financial system at a global level.
“If fresh US bond auctions require higher and higher yields and lower and lower prices, there is the possibility the system will get clogged up,” Thomas said, warning it “would have a knock-on effect to all financial markets.”
Such a scenario would not simply mirror the UK gilt crisis seen in recent years but would represent a shock many times greater in scale and reach across international markets.
The UK is considered particularly vulnerable given its elevated debt-to-GDP ratio and its existing domestic pressures from inflation exposure and prolonged political uncertainty bearing down on gilt markets.
Any sharp sell-off in US Treasuries would force the UK government to pay significantly more to service its own debt, piling further strain on already stretched public finances.
James Sproule, chief economist at Handelsbanken, argued the evolving situation should push Chancellor John Healey toward even greater fiscal discipline ahead of his upcoming Budget.
“Healey will have to meet both the letter and the spirit of the ‘golden rules’,” Sproule said, urging the Chancellor to show “debt to GDP falling by a per cent or more” and demonstrate rapid progress along the planned deficit reduction pathway.