Economic outlook: what do bond market developments mean for construction?

The cost of UK government borrowing has climbed to levels not seen since the late 1990s, adding pressure on the public finances ahead of the Autumn Budget on 28 October.

The government raises money partly by selling bonds, known as gilts. The yield is effectively the return investors demand for lending to the government. When gilt yields rise, government borrowing becomes more expensive and that can feed through into borrowing costs across the wider economy.

For construction, that can mean more expensive finance for developers and higher mortgage rates for homebuyers, potentially making it harder for some projects to go ahead.

But there is another side to the picture. Construction activity remains subdued, which means contractors are competing hard for work and tender price growth remains relatively restrained. For developers with viable projects and access to finance, there may therefore be an opportunity to progress work while construction pricing remains competitive, rather than waiting for borrowing costs to fall.

The Autumn Budget could influence how that balance develops into 2027.

What’s happened to gilt yields?

At the beginning of September, the yield on 30-year gilts climbed to around 5.9%, its highest level since 1998, while 10-year borrowing costs also reached levels not seen since before the global financial crisis.

A combination of global and domestic factors has contributed to the rise. Concerns about inflation, elevated government borrowing and changing expectations for interest rates have put upward pressure on bond yields internationally. In the UK, investors are also assessing the fiscal direction of the new government under Prime Minister Andy Burnham.

The consequences for the public finances could be significant. Deutsche Bank estimated at the beginning of September that higher borrowing costs could reduce the Chancellor’s fiscal headroom from around £26bn to £13.8bn. Fiscal headroom is effectively the amount available for additional spending or tax cuts while the government remains within its own fiscal rules.

Gilt yields are important beyond the government’s own borrowing bill. They influence the wider cost of finance across the economy, including the rates available to mortgage lenders, businesses and investors financing development.

Why this Budget carries extra weight

The government’s fiscal framework requires day-to-day spending to be covered by tax revenue by 2029. Chancellor John Healey therefore has to balance spending commitments against keeping the public finances within those rules.

Higher gilt yields make that task more difficult because they increase the amount the government expects to spend servicing its debt. They also mean the Budget itself could influence borrowing costs. A fiscal plan that reassures investors could help ease pressure on the bond market, while one that raises concerns about borrowing or inflation could push yields higher.

Speculation ahead of the statement includes possible changes to business rates, capital gains tax, pension tax relief, fuel duty and property taxation. Nothing is confirmed, and the scale of any measures will depend partly on the economic and fiscal outlook presented alongside the Budget.

What it means for construction

Higher gilt yields can feed through to construction by making finance more expensive. For developers, a higher cost of borrowing can affect whether the financial case for a project still stacks up, particularly in sectors such as housing and commercial development where debt plays an important role.

Mortgage rates can also be affected. If borrowing becomes more expensive for lenders, some of that cost can be passed on to homebuyers, putting additional pressure on affordability and demand for new homes.

Financing costs, however, are only one part of the development equation. Weak construction activity has kept competition for work high, limiting tender price growth even as contractors face renewed pressure on some input costs.

That does not necessarily make the current environment an attractive one for development. Higher financing costs, subdued demand and wider economic uncertainty continue to weigh on investment decisions. But for schemes that remain viable and have funding in place, relatively subdued tender pricing may provide some offset to those pressures.

The timing presents a difficult trade-off. Waiting could bring lower financing costs, but there is no guarantee that borrowing costs and construction prices will move favourably at the same time. If financing conditions eventually improve and construction demand recovers, contractors may have greater scope to increase tender prices.

For housebuilders, the challenge is particularly pronounced because higher borrowing costs can affect both the cost of delivering homes and the ability of buyers to afford them. Private housing output remains muted, while current rates of delivery remain well short of those required to meet the government’s target of 1.5 million net additional homes by 2030.

Commercial development faces similar financing constraints alongside longer-term changes in demand across some sectors.

Infrastructure is less directly affected by short-term changes in market interest rates than housing or commercial development. However, if higher gilt yields persist, the resulting increase in government debt costs could put additional pressure on future spending decisions, including capital investment.

Pressure remains across the supply chain

The financial position of the construction supply chain also remains challenging. There were 3,841 construction company insolvencies in England and Wales in the 12 months to July 2026, accounting for 17% of cases where industry was recorded.

The 12-month total was 3% lower than a year earlier but remained 19% above the equivalent pre-pandemic figure in 2019.

Specialist contractors remain particularly exposed to changing market conditions. Of the 343 construction insolvencies recorded in July, 186 were businesses involved in specialised construction activities.

The balance to watch

Earlier in the year, expectations of further Bank of England interest rate cuts offered the prospect of cheaper finance helping to revive stalled projects and improve development viability. That outlook has changed as higher energy prices have increased inflationary risks.

Bank Rate remains at 3.75%, with the Bank of England now balancing the risk of persistent inflation against relatively weak economic activity. At the same time, higher gilt yields have already tightened wider financing conditions, meaning developers face increased borrowing costs regardless of what happens at the Bank’s next meeting.

For developers, that makes the relationship between financing and construction costs particularly important. Current borrowing costs present a clear challenge, but subdued workloads and competitive tendering provide an offset for schemes that remain viable. Waiting for financing conditions to improve may reduce one cost pressure, but could also mean entering the construction market after activity and tender price growth have begun to strengthen.

The Autumn Budget will provide an important indication of the direction of fiscal policy and government borrowing. For projects being planned into 2027, the question is therefore not simply whether finance becomes cheaper, but how financing costs, tender prices and construction demand move relative to one another.

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