High borrowing costs are expected to reduce the government’s self-imposed fiscal headroom, limiting the amount the Chancellor can spend on consumer-friendly measures to ease the cost of living.

The yield on a 30-year gilt, a loan to the UK government, rose to 5.89% on Tuesday, the highest since 1998. The US, Japan and Europe have also seen similarly elevated borrowing costs in recent days. Every 0.25 percentage point rise in gilt yields adds roughly £2.5bn to the UK’s annual debt-servicing costs.

Escalating tensions in the Middle East are raising fears around inflation as global stock markets continue to be troubled. Analysts also raised concerns around the continued sell-off and underperformance in gilts, which have seen the 10-year yield surge to an 18-year high above 5.2%. As a result, the global market sell-off has wiped out an estimated £12bn of the government’s £23.6bn fiscal buffer, according to Bloomberg Economics.

Matthew Ryan, head of market strategy at Ebury, said: “This rise in yields, which will eat directly into the government’s fiscal headroom, raises the risk of tax hikes in the autumn, even before accounting for any additional spending increases that Burnham seems likely to pursue.

“Britain’s economy continues to expand at a surprisingly resilient pace, even as the labour market keeps deteriorating and borrowing costs continue to rise. One-month implied volatility in GBP has fallen to more than twelve year lows, though we expect that to prove a floor for some time given brewing budget jitters and the fact that August tends to be a low volatility month across financial markets.”

Dan Coatsworth, head of markets at AJ Bell, added: “Bringing markets down is a cocktail of worries around the scale of interest rate hikes that could be around the corner, geopolitical concerns, and fears that economic growth expectations might have to be revised down.

“Oil prices remain stubbornly high amid fighting in the Middle East and fears of supply disruptions. Brent crude oil is now hovering around $95 a barrel, nearly 20% higher than a month ago. That has major implications for businesses and consumers, pushing up the cost of goods and services, as well as energy.

“Investors are now staring directly into the eyes of an inflation monster that threatens to become stronger unless action is taken. Central banks typically raise interest rates to fight inflation, and market expectations for the scale of rate hikes continues to evolve.

“The market is now pricing in a 70% chance the Federal Reserve will raise interest rates in the US later this month, a 59% chance of another hike in October, and possibly one more in December.

“It’s a trio of pain this side of the Atlantic as well. Investors are pricing in one UK interest rate hike by the Bank of England this November, a second next February and a third by June.

“Having yesterday hit its highest since the global financial crisis at 5.26%, the benchmark 10-year gilt yield eased back slightly to 5.18%. That’s still significantly high enough to cause Chancellor John Healey sleepless nights before he’s even had a chance to present his first Budget.

“Bonds are reaching the point where certain investors may seek to lock in high yields caused by the latest market volatility. What might be holding them back is an expectation that yields could get even higher if rates go up fast and hard, meaning certain bond investors could be playing a waiting game before piling in.

“Equity markets were mostly in the red, although the scale of the decline wasn’t alarming. The FTSE 100 dipped 0.2% to 10,763, with investors finding solace in utilities, energy and financials while other sectors dragged their heels.”